Gallant-OCBC

Dreary 4Q08 results. Gallant Venture Ltd (Gallant) posted a disappointing
set of 4Q08 results. Revenue met our estimate with a 2.3% YoY
improvement to S$56.3m, but PATMI slipped into a S$2.0m loss from a
S$6.4m profit a year ago. For the full year, Gallant's revenue retreated
3.9% to S$225.2m while PATMI slumped 96.2% to S$0.6m.
Brought down by taxes. High taxes led to Gallant's downfall in FY08.
Taxes, at S$18.9m, more than wiped out its S$17.9m profit before tax.
The group swung into losses as a result. The exorbitant taxes were the
result of losses that could not be offset against the group's profits. Losses
from its property development and resort operations amounted to S$6.3m
and S$9.5m, respectively, but these could not be offset against earnings
from its industrial park and utilities segments. As a result, taxes incurred
from the profitable segments exceeded the group's overall earnings.
Property development at risk… We have highlighted the drought in land
sales as our key concern in previous reports. This continues to plague the
group, with its S$67m order book at a standstill since July 08. In addition,
we foresee heightened risk of order cancellations and deferments in light
of the sickly investment climate and credit crunch. So far, Gallant has not
experienced any order cancellations but has seen requests to defer
payments. We do not rule out the possibility of outright cancellations as
the global economic recession bites deeper. Order cancellations are a
key risk, in our view, as these would deprive Gallant of the cash flow needed
to sustain its ongoing development projects.
…And so are its industrial parks. The group's industrial parks, previously
thought to be its cash cows, are similarly likely to face challenges as
businesses scale down their operations in response to the global economic
crisis. We expect occupancy levels and rental rates to come under pressure
as demand for industrial parks weaken.
Bleak outlook. Gallant faces a bleak outlook in FY09. A revival of credit
markets, capital investments and tourism are essential to Gallant's
sustainability. In the absence of near-term price catalysts, we are
suspending our coverage on the stock.