HOE vessels business, a deadweight -- OCBC

Regional supplier of components. Hoe Leong Corporation Ltd (HOE) is one of the biggest suppliers of heavy equipment components in the region. The group carries about 20,000 types of equipment parts for equipment such as bulldozers and excavators. The end users of these equipments and parts typically operate in mining, forestry and construction. While HOE aims to expand its operations globally, Asia remains its key market with more than 80% of revenue from Asia.

Eyeing Australia and other markets . The group's components business is most exposed to the Indonesian and Malaysian markets. Demand from both countries was healthy in the past year, despite economic turmoil in US and Europe; and are expected to remain so in the next two years, buoying its near term prospects. HOE has also been building up its manufacturing segment, through the expansion of its manufacturing capacity and the marketing of in-house brands, and will be eyeing growth by expanding into regions such as Australia.

Vessels chartering: calm waters in the near term. In recent years, the group has also added a new business segment - vessels chartering. This unit has expanded rapidly, growing its fleet to 18 vessels in just under four years. While its young fleet of vessels have charter contracts till at least end of CY12, we believe the outlook beyond will not be as rosy. There is an abundant supply of offshore support vessels operating within the Asian region and unless oil & gas production and demand for these vessels pick up significantly, charter contracts will
be hard to come by.

Initiate with HOLD. HOE's share price has taken a heavy tumble during 2011 - down around 37% YTD. At current level, HOE is only trading at 2.1x P/E on forward FY11 earnings. This is below HOE's own historical average P/E and the average P/E of its closest competitors. Despite the concerns we have on the vessels chartering business beyond the next couple of years, current valuations appear undemanding. Applying a 3.5x P/E to its FY12, we derive a fair value estimate of S$0.20 or potential upside of about 9% However, given the company's small market capitalisation and illiquidity, we initiate with only a HOLD rating.