Company Name: SOUND GLOBAL LTD.
| Research House: DBS Vickers | Price Call: HOLD | Target Price: 0.63 |
Sound Global’s 1Q13 was hurt by higher interest expenses and taxes, says DBS Vickers. The company reported a net profit of RMB 61.5 million ($12.3 million). This was 20% lower y-o-y and 25% lower q-o-q. The net profit was also 10% below DBS Vicker’s forecast despite higher sales.
Excluding RMB 5.3 million forex gain, core profit would even be lower at RMB 56.2 million. The house says a key shortfall was finance costs which skyrocketed to RMB 76.8 million from RMB 30 million because the interest for the US$ senior notes surged to $41.7 million vs its forecast of $29.3 million, due to withholding tax. The tax rate was also higher at 25% vs its assumption of 15%. 1Q13 gross margins were higher at 32.9% compared to 30.4% in 1Q12 and 29.2% in 4Q12.
However, Sound Global reported that all business segments improved. Sales grew 17% y-o-y to RMB 519.3 million, about 20% above DBS Vickers’ estimates. Offshore & Marine grew the most, up 164% y-o-y to RMB 41.6 million, forming 8% of group sales from <4% previously. After deducting 1Q13’s revenue, the house estimated that Sound Global’s current EPC orderbook would be about RMB 3 billion.
Growing O&M would contribute to a good base of recurring income however, high finance costs have negated the benefits as reflected by 1Q13 results. Unless future sales can generate substantially higher returns or higher margins and O&M can offset steep borrowing costs, earnings growth would be compromised, says DBS Vickers.
“We have cut FY13F/14F to reflect higher finance cost. In view of deteriorating earnings outlook, we have also reduced valuation peg to 11xFY13 (-0.5 SD). Consequently, target price is lowered to $0.63. Downgrade to Hold given limited upside to new target price,” says DBS Vickers.
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