Delloyd a diversified group with steady earnings, says OSK

Delloyd Ventures Bhd
(July 7, RM2.77)
Initiating coverage with buy call at RM2.75 with target price of RM3.90: We see exciting times for Delloyd. While its domestic segment will continue to be resilient, owing to strong vehicle sales and new models in the pipeline, we believe the group’s earnings momentum will come from its automotive (including bus manufacturing) and plantation divisions in Indonesia.

After a steep decline in TIV in both Indonesia and Thailand, we expect the strong recovery in demand for vehicles in 2010 to benefit auto component makers across the board. This will see demand sustaining for the next few years given the low vehicle penetration in emerging markets, such as Indonesia, which are experiencing growing affluence.

Having delivered 42 buses over the past three years, the management expects to secure orders for 48 new buses by year-end. The number of buses secured over the coming years will continue to be spurred by expansion of the transportation networks in Jakarta and other major cities in Indonesia. This will in turn boost revenue and income contribution significantly.

We anticipate growth over the next few years to be robust, as Delloyd’s plantation estates in Pulau Belitung in Indonesia experience growing yield in the immediate term. As at end-2009, 54% of its estates are planted with oil palm of 6-11 years old. Furthermore, the commencement of its CPO processing mill in mid-May  kicked off the sale of CPO (previously FFBs) which will enhance profitability margins.

We initiate coverage on Delloyd with a buy recommendation and a target price of RM3.90, based on a 12-month rolling EPS pegged at a PER of eight times, which is slightly higher than our auto parts sector valuation of seven times owing to its palm oil exposure and growing earnings base in the immediate term. We see limited downside risks to the stock as it is well supported by share buyback activities as well as the compelling and attractive valuation compared with other auto counters after taking into account the landbank valuation of its plantations. — OSK Research, July 7


This article appeared in The Edge Financial Daily, July 8, 2010.