Tsit Wing Int'l Holdings Ltd: FY08 earnings marred by hedging losses

Earnings slump exacerbated by hedging losses. Tsit Wing International Holdings Ltd's (TWI) 4Q08 earnings were slightly short of our estimates, mainly due to hedging losses. 4Q08 revenue grew 8.1% YoY to HK$107.1m but net profit slumped 72.8% to HK$2.5m. For the full year, revenue climbed 10.9% to HK$402.4m while net profit slid 43.5% to HK$20.0m. Net profit for the year would have fallen by a smaller 16.0% to HK$29.7m if not for hedging losses of HK$8.1m and goodwill impairment of HK$1.6m. The hedging losses arose from the group's attempt to smoothen out volatile coffee prices by taking positions in the futures market. Unfortunately, the group's effort backfired as wild swings in coffee prices led to losses instead.

Dividends disappoint. TWI has declared a second and final dividend of 2.5 HK cents, falling short of our expectations of a 7.5 HK cents dividend. This brings the group's total dividends for the year to 6.0 HK cents, substantially lower than its 11.0 HK cents historical track record and bringing its yield down to 5.6% from 10.3% previously. We think that the decision to reduce dividends could have been motivated by cash conservation priorities in light of the global credit crunch. Our dividend assumptions have been lowered to incorporate the group's lower payout.

Margins came under pressure. Profit margins came under pressure in FY08 due to high commodity prices in 1H08. Gross profit margin contracted 3.7ppt to 34.8% while net profit margin shrank 4.8ppt to 5.0%. Excluding impairment and hedging losses, net profit margin would have fallen by a smaller 2.4ppt to 7.4%. On a brighter note, margin pressure appeared to have somewhat eased in 4Q08 with gross profit margin recovering 2.6ppt QoQ to 36.1%. We expect margins to improve gradually in FY09. However this could take a few quarters as TWI's inventory still consists of costly raw materials purchased during the commodity boom, as reflected in its high level of inventories amounting to HK$73.2m (vs. HK$57.4m a year ago).

Maintain HOLD. We rollover our valuation to FY09F NTA, and keeping our 0.9x parameter intact, derive a fair value estimate of S$0.22 (previously S$0.21). We do not anticipate any major price catalysts for the stock, but the group's consistent dividends, albeit much lower now, provide regular returns. We maintain our HOLD rating on the stock.

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