Koda Ltd: Growing in Vietnam

Strong FY07 results expected. We recently visited Koda Ltd to get an
update on the company’s plans and growth strategies. But first off, Koda is
due to report its FY07 results in August, and we expect to see another year
of strong growth. For its 1H07, Koda posted a 37% YoY rise in revenue to
US$34.1m and 79% jump in net income to US$3.8m. We project a further
46% YoY growth in 2H07 revenue to US$33.9m and 42% rise in net income
to US$3.6m, implying a 41% increase in FY07 revenue to US$68m and
59% increase in FY07 net income to US$7.5m.

Continued growth in Vietnam. We are also bullish about its FY08
prospects, driven by its continued expansion of production capacity in
Vietnam. Phase 1 expansion, which is due to be completed in September
2007, will increase its production capacity by 25%. Phase 2 expansion,
with its target completion in March to April 2008, will add a further 25% to
30% to its production capacity. We view these expansions as timely moves,
given Koda’s strong order book. Part of the increased capacity may be
allocated as dedicated capacity for Koda’s major customers.

Growing Vietnamese economy. Post expansion, 70% of Koda’s total
production will be derived from Vietnam. The country also contributed 13%
of its net profit in 1H07 and we expect this contribution to grow in FY08.
With Koda’s increasing exposure in Vietnam, we expect investors to take
a second look at Koda as a proxy to the relatively inaccessible but rapidly
developing Vietnamese economy. Vietnam’s Deputy Prime Minister expects
the economy to double in size every 10 years, driven by its accession to
the World Trade Organization in January this year. We also believe this
signals a friendly operating environment for Koda, and with perks like tax
holidays for the next 12 years, it will sustain its low-cost production facilities
there.

M&As are possibilities. With the continued improvement in Koda’s balance
sheet from a net gearing of 13% in FY06 to net cash in 1H07, management
may consider the acquisitions of smaller players to vertically integrate its
production process. Although management did not elaborate on this front,
we believe such M&A activities could take place after the completion of
Koda’s Vietnam expansion. Given rosy outlook for FY08 and beyond, we
maintain BUY with fair value of S$1.25 for Koda, based on 10x FY08 PER.