Inter-Roller Engineering, Feb 16 close : 88.5 cents (+5 cents)

DBS Vickers Securities, Feb 16

FY04 results were within expectations. Revenue grew 32 per cent year-on-year to $70 million, while net earnings rose 56 per cent to $10.3 million benefiting from gross margin expansion and improved operating efficiencies. Company has a current order book of $60 million and is negotiating for over $200 million worth of projects, which should underpin top line growth over FY05-06. Valuations are compelling with IRL trading at 8x FY05 and 6.6x FY06 PE, and offering an attractive dividend yield of 8.4 per cent on FY05 DPS of seven cents. Our one-year target price is raised to $1.27, based on 10x PE on FY06 earnings. Maintain 'buy'.

Operating profit rose 53 per cent, aided by a 5.1 point increase in gross margin, as IRL reaped the benefits of its expansion into lower-cost manufacturing facilities at Pontian, Malaysia, as well as the operating leverage stemming from a 32 per cent increase in sales.

Despite an enlarged share capital (post rights issue), IRL declared a final net dividend of four cents per share, similar to FY03's four cents. Together with the interim dividend of two cents, the total payout for FY04 was six cents versus five cents in FY03.

We believe that IRL is a beneficiary of the growth in airport development spending worldwide, particularly in developing regions. It is currently negotiating for projects worth over $200 million across China, the Middle East, Southern Europe, South America and other parts of Asia.

We think that IRL stands a good chance of winning a good chunk of these projects due to its cost competitiveness. For example, IRL (together with Siemens) was the lowest bidder for the Beijing Airport project, worth over $50 million, and award of this contract is expected to be announced soon. IRL may also exceed our forecasts if it is able to secure some larger projects, such as the $90 million Dubai contract that has been under negotiation for the past year.

We have raised our target price to $1.27, based on 10x PE on FY06 earnings. IRL's management reiterated its dividend policy of 1.5x dividend cover, which is equivalent to a 67 per cent payout ratio. As such, IRL offers a prospective dividend yield of 8.4 per cent in FY05F, almost similar to its undemanding 8x FY05 PE. - BUY.

《The Business Times》