By Lee Wen Ching
Wed, 28 Jul 2010, 08:50:25 SGT

Koda Ltd’s (Koda) shares have underperformed over the last two months, falling 13% vs. the STI’s 3% gain, possibly on concerns over disappointing US economic data and lackluster home sales. While recent data suggests that the US economy’s recovery has softened, economists do not expect a renewed downturn. With its stock trading at just 0.7x NTA, we believe that negatives have been more than sufficiently priced in. We highlight that Koda is poised for a return to profitability in FY10 and expect a five-fold rebound in FY11 earnings. Nevertheless, we acknowledge that renewed weakness in consumer spending could potentially dampen its recovery, and have toned down our projections accordingly. We see value at current levels and maintain our BUY rating on Koda in anticipation of a strong earnings rebound in FY11. Our fair value estimate has been trimmed to S$0.275 (previously S$0.30) following revisions to our projections.

US economy: moderating – not negative - growth. Disappointing US economic data in recent weeks have raised concerns that the economic recovery could be tapering off. For instance, unemployment claims have been climbing, consumer confidence has been on a decline, and home sales recently hit an all-time low in May. Although home sales have since rebounded by 23.6% MoM to 330,000 units in Jun, it is still down 16.7% as compared to a year ago and market watchers have cautioned that sales could decline in the near future on the back of persistent unemployment. Nevertheless, while recent data suggests that the US economy’s recovery has softened, economists do not expect a renewed downturn.

Negatives priced in at current valuations. Such lackluster economic data has weighed on Koda Ltd’s (Koda) shares, which have retreated by 13% over the past two months vs. the STI’s 3% gain over the same period. With the stock trading at just 0.7x NTA, we believe that negatives have been more than sufficiently priced in. In fact, we highlight that Koda is poised for a return to profitability in FY10 with the worst of the sub prime crisis behind it. The group has chalked up 9M10 earnings of US$0.4m, reversing its US$0.2m loss a year ago. We expect earnings recovery to gain momentum from FY11 onwards on the back of its enlarged capacity. Nevertheless, we acknowledge that renewed weakness in consumer spending could potentially dampen its recovery, and have toned down our projections to allow for a softer rebound in earnings.

BUY in anticipation of earnings rebound in FY11. We have trimmed our FY10 net profit forecast to US$0.3m (from US$0.7m) as we anticipate margin pressure in 4Q10 arising from operational inefficiencies associated with the start up of its new factory. Koda’s FY10 results are expected around 26 Aug, during which we will be seeking updates on its order book and management’s assessment of the impact of a slowdown in the US and UK on the group’s earnings. Beyond what could be a muted set of 4Q10 results, we are forecasting a five-fold jump in FY11 earnings to US$1.5m on improved operating margins. We maintain our BUY rating on Koda in view of its undemanding valuations and anticipated strong earnings rebound in FY11. Our fair value estimate, still based on NTA, has been trimmed to S$0.275 (previously S$0.30) following revisions to our projections.