Jaya

Jaya reported a net profit of S$120.8m (+13% yoy) for FY07. Effective tax waslower at 11% compared 16% in FY06, due to the earnings mix. FY07 registereda higher portion of tax-exempt earnings (i.e. offshore shipping and gains fromvessel sales) while taxable shipbuilding earnings were lower. Gains from vesselsales totalled S$38.6m in FY07, 50% higher than FY06’s S$25.7m. Eightvessels were sold in FY07.Excluding gains from vessel sales, net profit in FY07 was S$84.7m, flatcompared to FY06’s S$85.0m. Offshore Shipping net profit (ex gains fromvessel sales) rose 52% to S$30.5m in FY07. Despite a lower fleet of 28 vesselsas of end-FY07 compared with 33 vessels as of end-FY06, fleet utilisation wasmarginally higher at 81% compared with 79% in FY06 and average revenue pervessel charter day was 27% higher at S$8,249 in FY07 compared with S$6,493in FY06. Conventional shipping continued to contribute marginal earnings asthere is only one vessel left in the fleet. Shipbuilding net profit fell 16% fromS$61.7m in FY06 to S$52.1m in FY07.Going forward, Jaya expects the number of newbuild deliveries will rise from 11in FY07 to 18, 24 and 21 in FY08, FY09 and FY10 respectively. Sustainingearnings will depend on large gains from vessel sales being maintained. ForJaya, shipbuilding and vessel sales are inter-changeable as vessels that areordered on a speculative basis, if they are sold after completion, they aretreated as vessel sales whereas if the same vessels are sold when they areunder construction, they are recognised under shipbuilding. Hence, vesselsales should be viewed as operational transactions and not one-off items. Weraise our FY08 and FY09 net profit forecasts from S$105.0m and S$93.5mrespectively to S$133.0m and S$140.0m on more aggressive gains from vesselsales and shipbuilding earnings, and initiate our FY10 forecast at S$150.0m.Nevertheless, Jaya is already on a large earnings base. Compared with someof the other offshore & marine stocks, its earnings growth will be relativelymodest. There are hopes that M&A exercises could be a share price catalyst.However, such exercises are not in sight at this junction. As such we remainneutral on Jaya and maintain our HOLD recommendation. Against a 3-yearCAGR growth of 7.5%, we value Jaya at S$1.80 or 10x FY09 earnings (20%discount to Singapore’s small and mid-cap O&M sector’s PE rating of 12.5x).