King’s Safetywear Ltd: Return of the King

Undiscovered stock; pick-up in FY06 earnings. King's Safetywear Ltd
(KSW) reported a strong set of FY06 results with topline growth of 11.4%
to S$91.4m. Cost controls in admin and marketing enabled net profit to
surge 89.6% to S$5.1m. This was a vast improvement from FY05 when
topline grew a meagre 5.7% to S$82m while net profit dove 25.5% to
S$2.7m. The biggest topline contribution came from Asia, which grew 16%
to S$62.2m. The loss-making EU operation is likely to turn in a small profit
this year. The market appears to have missed the pickup in FY06 earnings
as the stock is not yet on analysts' radar screen.
Better operational efficiencies. KSW closed down its Malaysian and
Jakarta facilities to consolidate operations into the new Batam plant. This
will yield savings with better inventory and operation management. With
the new facility paid for and the present capacity at only 60% utilisation,
we expect capex for the next 1-3 years to be minimal.
Booming sectors to support revenue. BCA estimates that Singapore
construction contracts to be awarded in 2007 at S$17-19b and another
US$624b in construction contracts over the next 15 years in Saudi Arabia.
Personal safety equipment is a non-negotiable expenditure and is mandatory
and this will provide a constant stream of revenue stability for safety
equipment manufacturers like KSW.
Expansion through M&A. Management has indicated that there could be
acquisition opportunities in this fragmented industry. For FY07, we forecast
a cash balance of about S$10m. To launch into its next phase of growth in
FY08/09, we think that KSW could acquire a brand in US or Japan to gain
a quick entry into these lucrative markets and the future possibility of
venturing into the high-margin retail market with its upmarket Otter brand.
Strong FY07, kickers in FY08/09. We forecast KSW FY07 topline growth
of 12.9% to S$103.2m and operating profits growth of 23.2% to S$9.8m,
but expect bottomline to inch ahead by 3.2% to S$5.3m due to the S$1.5m
Jakarta plant closure compensation to be paid out in 1H07. Excluding this,
FY07 net profit would have surged 25% to S$6.4m. We derive a fair value of
S$$0.46 (27% upside) using blended 16x FY07/08 EPS (30% discount to
its consumer peers). At current levels, KSW still offers a good opportunity
to get into a recovering company with added earnings kickers in FY08/09.
We initiate coverage on KSW with a BUY rating.