That Silver Birdie.. Part III

On 23rd December 2005 there were 2 research reports posted on the Bursa Malaysia eResearch website.

One was from Standard and Poors who gave it a BUY recommendation.

• Recommendation & Investment Risks
  · We maintain our Buy recommendation on Silver with a 12-month target price of MYR0.73 (unchanged). This translates to an upside of 16.8%. Silver is trading at PERs of 6.8x FY05 and 6.2x FY06, which are at significant discounts to the market, the consumer sector and its peers. Even on a fully diluted basis (for full warrant conversion), PERs are still relatively inexpensive at 10.3x FY05 and 9.2x FY06.
  · We attribute a fair PER of 10.4x to Silver’s FY06 fully diluted EPS, based on a 20% discount to the average market PER. After including our net DPS forecast at MYR0.02 for FY06, we arrive at our target price of MYR0.73.
  · Our main concern is Silver’s high net gearing level of 85% as at end-FY05. Although Silver intends to sell some of its extra pieces of land in Nilai, Negeri Sembilan and Shah Alam, Selangor to raise cash to repay its debts, we expect its net gearing to remain at 80-90% over the next few years, due to capex requirements. Nevertheless, interest cover is still manageable at 5-6x.
  · Risks to our recommendation and target price include the possibility of larger-than-expected start-up losses in SBI, which could lead to higher borrowings to fund its capital requirements, thereby putting further pressure on Silver’s balance sheet.

Standard and Poors had projected a net earnings of 21.8 million for Silver Bird's fy 2006 earnings. (LOL! Omigod OSK in Aug 2005, estimated Silver Bird earnings for fy 2006 will be around 47.4 million!!! WOW! and WOW!!!)

The other report on 23rd December 2005 was from CIMB Securities Sdn Bhd who issued a SELL on Silver Bird.

• Recommendation
  FY06 performance will be pulled down by initial losses from SBG’s first full-year operations in the previously untested Singaporean market. SBG is expected to enjoy maiden net profit contribution from Singapore from FY07 onwards.
  SBG’s vehicle for entry into the Singapore market is Silver Bird International, which has a paid-up capital of RM40m. SBI is owned by SBG (60%), EPF (30%) and Mayban Ventures (10%). Products to Singapore are supplied by the Shah Alam plant. Mirroring the situation in Malaysia, Gardenia dominates the market in Singapore. We believe that Gardenia’s driving force is its healthier and calorierestricted bread lines. Its products are delivered to 18,000 sales points vs. approximately 9,600 for SBG. Gardenia is 70% owned by Singapore-based QAF Ltd and 30% owned by Malaysia’s public-listed Padiberas Nasional Bhd.
  Operations aside, our concerns over the issuance of convertibles and dilution of EPS remain. With SBG’s track record, we cannot discount the risk of further issuance, more so given the company’s high net gearing of 83%.
  We maintain our forecasts and SELL recommendation. Our target price is unchanged at RM0.53 based on 8x CY07 P/E. For FY06, we project a 4% dip in net profit, but a steeper drop of 36% for FD EPS due to an enlarged FD share base.
  Although it is understandable that SBG is not paying dividends in FY05 given its losses in Singapore, the absence of dividends will dampen investors’ interest in the stock. Investors can get better dividend yields of 6-12% through the more established F&B players, i.e. Nestle, F&N and Dutch Lady.

CIMB Securities had projected a net earnings of 18.6 million for Silver Bird's fy 2006 earnings.

LOL!!! Isn't it amazing that OSK in Aug 2005 had projected a net earnings of 47.4 million for Silver Bird fy 2006?

And two issues pointed by CIMB is worth noting...

• • …but 33% FD EPS contraction. Despite the 16% growth in net profit, FD EPS dropped by 33% as the share base was enlarged by the issuance of 105.3m warrants in Sep 05. Note that SBG has been issuing EPS-dilutive instruments since its listing in Jun 02, leading to a divergence between its net profit and FD EPS. Its high net gearing of 83% at end-Oct 05 is also a concern.
  • Warrant conversion. With a strike price of 80 sen, the 2005/2010 warrants are out of the money. However, on 8 Dec 05, 75,000 new shares were listed after conversion of some warrants.

By the way, it was on 16th Nov 2005 when CIMB initiated coverage on this stock. ( Silver Bird Group initiating coverage, Sell and 53sen target price )

And CIMB reasoned out why they gave such a low valuation for Silver Birdie...

• Valuation
  We value SBG at 8x CY07 FD EPS of 6.6 sen, giving us a target price of RM0.53.
  The benchmark 8x P/E is SBG’s average P/E for 2002-05.
  SBG is trading at lower P/Es than its peers London Biscuits and Hup Seng (Figure 3). However, we believe this discount is warranted given SBG’s history of issuing EPS-dilutive instruments since its listing in Jun 02. With its track record, we cannot discount the risk of further issuance, especially in view of SBG’s relatively high netgearing of about 80%. Since the start of the year, the share price has dropped by 48%, indicative of shareholders’ alarm over SBG’s falling FD EPS even as net profit continued to march upwards.
  For FY10/06, we project a 15% net profit drop primarily due to a higher tax rate of 28% from a very low 2-3% in FY02-05. Prior to FY10/06, Silver benefited from tax credits, which ended on 31 Oct 05. We assume a statutory tax rate of 28% for FY10/06-07.
  The FY10/06 net profit drop, unfortunately, translates into a wider 42% drop in FD EPS due to issuance of 105.3m warrants in Sep 05. The FY10/06 performance will also be pulled down by initial losses from SBG’s first full-year operations in the previously-untested Singaporean market. If the venture goes well, SBG will enjoy maiden net profit contribution from Singapore in FY10/07.

Hmm... the dilution of earnings from the issuance of more shares and the end result?

• The share price has dropped by 48%, indicative of shareholders’ alarm over SBG’s falling FD EPS even as net profit continued to march upwards.