SINGAPORE (Aug 15): UOB KayHian is highlighting Stamford Tyres as a stock that’s “poised to reap the benefits of a lengthy exercise to streamline operations”, and believes investors can look forward to rewarded in tandem with the success of the company in the near-term.
Stamford Tyres retails and distributes tyres and wheels for passenger, commercial, industrial and agricultural vehicles.
The company recently reported a trebling of its FY17 earnings to $8.1 million on improved gross profit margins due to value-added activities at its Stamford Tyres Mart retail chain and truck tyre centres, as well as lower costs.
See: Stamford Tyres’ full year earnings treble to $8.1 mil
In an unrated report on Tuesday, analyst Nicholas Leow opines that this earnings momentum is likely to be maintained in FY18, which could lead to a net profit of $10-11 million in FY18.
“Over the last few years, Stamford Tyres had undergone many operational changes such as natural forex hedging in locations where it is expensive or impractical to hedge forex risk, and being more inventory-light by rationalising excess inventory,” notes Leow.
The analyst believes that with improving gross margin and management’s margin enhancement initiatives carried out from FY15-17, FY18 could be the year in which the company returns to revenue growth.
He further highlights how its current valuations are attractive as the stock is currently trading at 0.66 times its FY17F price to book ratio.
Given such valuations versus its peers such as Apollo Tyres and YHI International which trade at an average FY18F PE ratio of 10.9 times, the analyst reckons a fair value of between 46 cents to 50 cents would be justified for Stamford Tyres.
The company has potential to trade at a much bigger discount to the current book value should it revalue its properties, adds Leow, who estimates properties on the group’s balance sheet to add up to a worth of as much as $80-90 million versus its property book value of about $50 million – hence providing investors what the analyst calls a “nice margin of safety”.
Lastly, Leow notes that the group has never failed to pay out dividends to shareholders every year, with the exception of FY09.
“The dividends paid have been in relation to the company’s performance for the year. Should STC record a net profit of between S$10m-11m, STC could potentially pay out a generous dividend of between 1.5-2.0 S cents /share which translates to a healthy dividend yield of between 4.3-5.8%,” he concludes.
As at 11.54am, shares in Stamford Tyres are trading 1.5% lower at 34 cents.
