SIGN ... Feb10

Condo launches resume
Order-book of RM80m to sustain near term earnings
Bidding for RM130m projects
Low 6x P/Es, with decent yield – but flattish earnings

Recent Developments – resumption of condo launches
The recent resumption of condominium launches augers well for Signature International (RM1.50), the country’s leading player for branded kitchens and
wardrobes.

In particular, it will benefit the company’s project sales, which account for around two-thirds of total revenue. Signature is the market leader in project sales given its size, economies of scale, execution and excellent track record.

Project sales are undertaken for fitting out entire projects with property developers, where fully-fitted kitchens are usually provided by the developer.
This is typically the case for condominiums, especially high-end ones, where fully fitted kitchens are part of the standard fixture and fittings. Wardrobes are also increasingly being included in many high-end condominiums.

In contrast, kitchen fit-outs are usually not provided by developers of landed houses, except for very high-end homes. Signature’s retail sales, which account for the remaining one-third of revenue, thus cater more towards landed homes.

It will benefit from the even stronger sales of landed property homes in recent months. However, there is much stronger competition in the retail segment due to the far larger number of smaller competitors.

Property launches resuming
Sentiment for properties has improved markedly since mid-2009, boosted by the global economic recovery, record low interest rates, the long running stock market boom, innovative financing schemes and strong mortgage approvals from banks.

There was a slight dampener from the government’s decision to re-impose the 5% real property gains tax (RPGT) starting this year, but this has subsequently been relaxed to apply only for properties sold within five years.

The RPGT impact, fortunately, has not been as severe as feared. SP Setia, for instance, chalked up RM300 million in sales for Nov 2009, after the announcement of the tax. Sunrise has also chalked up near 50% sales of its 28 Mont’Kiara despite being soft-launched in Dec 2009.

Much of the improved sentiment for properties has come from the landed segment. SP Setia has been the clear leader here, chalking up sales of RM1.65 billion for its October 2009 financial year, mostly from its Setia Alam and Setia Eco Park townships in the Klang Valley.

The high-end condominium sector had earlier lagged the landed segment. But it is starting to see a recovery with a number of new launches over the last few months – and several more in the pipeline.

Some of the recently launched condominium projects include E&O’s St Mary’s Residences, DNP’s Verticas Residensi and SP Setia’s Setia Sky Residences (Phase 2), all in Kuala Lumpur; 28 Mont’Kiara by Sunrise in Mont’Kiara; Dijaya’s Tropicana Grande in Tropicana Golf & Country Resort and SDP Properties’ Five Stones in SS2, both in Petaling Jaya.

The best received of these new launches is Sunrise’s 28 Mont’Kiara. Since its soft launch just in Dec 2009 – and without the benefit of even a show unit yet, some 200 units of the 460-unit luxury condominiums have been effectively sold. The well-designed units are sized from 2,500-3,000 sq ft and are priced at around RM785 psf, with an attractive 5-year zero payment plan.

Positive for Signature’s order-book
As kitchens and wardrobes are the final fittings in a property, Signature will continue to see good demand over the next year from earlier projects that
are under construction.

The recent resumption of condominium launches will create a new pool of demand for Signature’s products 2-3 years later – and fill the void when the current order-book ends.

For instance, we also note that Signature has traditionally been supplying kitchen fittings for Sunrise’s projects, including 10 Mont’Kiara and 11 Mont’Kiara, among others. It is also supplying to most of the major high-end projects in downtown Kuala Lumpur, including The Troika, Suria Stonor and Pavilion Residences.

Signature’s current project order-book stands at RM80 million, as at 1 Jan 2010. This was higher than the RM73 million in Sept 2009, and in line with its average sum per quarter.

The order-book sustainability shows a high replenishment and bidding success rate, since Signature recognizes about RM25 million of project revenue each quarter.

The company is presently bidding for RM130 million worth of projects. In Dec 2009, it won RM24.7 million contracts to supply to five projects, including The Pearl on Jalan Stonor and 11 Mont' Kiara.

The current order-book will sustain income for another year, and will largely assure earnings until 1H FY June 2011. However, there may be a lull in FY2012 until the newly launched condominium projects near completion. This is due to the limited number of new launches from mid-2008 to mid-2009, due to the financial crisis.

Toward this end, it is diversifying its geographical risks through overseas expansion. The overseas expansion and showrooms are largely funded through distributorship arrangements with external agents, Thus, they pose relatively low financial risks to Signature.

To its credit, Signature has not been affected by Dubai’s property bust, unlike many other Malaysian companies there. Signature’s exposure there was small, solely in the Palm Jumeira project, whose contract was valued at RM14 million. We understand the project is now completed with final touchups being undertaken, and the outstanding amount is just RM1.2 million.

Earnings Outlook & Recommendation
Signature’s valuations are reasonable, with near-term earnings supported by its order-book. We like its strong branding and scalable production business model.

After a period of very strong growth from FY2005 to FY2009, where net profit surged from RM5.5 million to RM19.9 million, we expect relatively flattish net profit of RM20.4 million in FY2010, before rising 5.6% to RM21.5 million in FY2011. This translates to EPS of 25.5 sen and 26.9 sen, respectively.

Note however, that our earnings forecast for FY2010-2011 have been revised down by 13% due to more conservative order-book replenishment assumptions. The longer term-outlook should improve as property launches resume.

At RM1.50, Signature’s shares are trading at low P/Es of 5.9 and 5.6 times FY2010-11 earnings, albeit with relatively low near-term growth, but largely assured earnings.
The stock also offers relatively high dividend yields due to a cash-rich balance sheet (net cash of RM20.9 million in Sept 2009).

Net dividends per share increased from 5 sen in FY2008 to 8 sen for FY2009, or a net yield of 5.3%. We are conservatively assuming a return to the 5 sen payout in FY2010-2011, with a still generous 3.3% net yield and about 20% payout ratio.