Federal International (2000)
Nov 2 close: $0.805
OCBC INVESTMENT RESEARCH,
Nov 1

SALE of HP&T Products Inc: Federal International (2000) announced yesterday that it had entered into a stock sale agreement with T-3 Energy Services Inc for the sale of Federal’s 60 per cent owned Houston-based subsidiary HP&T Products Inc. The cash sale was on a “willing buyer willing seller” basis. Federal’s gain on the disposal of HP&T is $15.8 million. This divestment is beneficial for Federal. We understand that Federal’s involvement in HP&T was merely that of an investor and that it did not distribute or trade HP&T products directly. This being so, we believe the HP&T divestment to have no impact on Federal’s distribution business and would allow it to consolidate and streamline its growing business divisions. Shifting focus towards recurring income stream: The conversion and chartering of Federal 1 FSO to PetroChina on a 10-year, US$91.3 million contract was

Federal’s first giant leap to diversify away from its core business of trading. The chartering of FSO allows it to generate a stable and sustainable recurring income stream. We believe that Federal would be looking into the feasibility of acquiring more FSOs. We view another growth opportunity for Federal would be in the build, operate and transfer (BOT) of Cogen facility projects both locally and regionally. Finally, in terms of financing of these growth segments, we see the cash from the HP&T divestment would definitively help.

Maintain “buy” rating: We view this divestment positively as it enables Federal to shift focus to a recurring income business model. However, we are concerned about the FSO supply market and the execution risks faced in these maiden projects. This being so, we await the successful execution of its BOT project for Natural Fuel Limited in the next few months. In terms of earnings, we are revising our forecast to reflect the gain on disposal but net of loss in earnings contribution from HP&T. Our revised forecast is now $23.2 million and $16.6 million for FY2007 and FY2008 from $17.1 million and $20.4 million. In light of the lower FY2008F earnings, our fair value is revised slightly downwards to $1.02 (from $1.05) based on PER 15X FY08 fully diluted earnings. Maintain “buy”. BUY

《The Business Times》