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Friday, November 24, 2006

Sitra @ 36.5 cts ( Wood products / Singapore ) 3 comments

Final Poll Results: 1:0

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1. Expensively priced relative to peers

2. Micro-player with no obvious competitive strengths

3. Uncertain outlook for household discretionary expenditure

4. Limited fundamental benefits from Chew family linkages

Sitra was listed just last week and shot up to over 30 cents from its IPO price of 21 cents. At 36.5 cents, it is trading at 14.7X FY05 PE. It is not purely a furniture industry player; more accurately it is a wood-based products supplier/distributor. The demand and upstream cost dynamics may be taken to be similar to furniture players, so some SGX-listed furniture peers are listed for comparison. HTL, the erstwhile market leader, is languishing at 7-8X trailing PE, having corrected sharply these few weeks. Man Wah is trading at 8X PE. Lorenzo, a recently-listed sofa supplier, trades at 7X PE with little liquidity. Koda, probably the most comparable peer because its niche is also outdoor wood-based furniture, trades at 8-9X PE. So what distinguishes Sitra? Let's try to identify the structural competitive strengths that could justify the apparently high pricing.

Tradtional definitions of competitive strengths centre around three main factors: cost, differentiation, focus. It is difficult to see that Sitra enjoys any kind of cost advantages from economies of scale because it is such a small company. Its FY05 revenue was only S$59M, comparable to Koda which has a longer track record post-listing. A possibility that it could manage costs better is due to its background as a timber merchant before it went into selling wood products; the company obtains its wood raw material from Indonesia where it has long-established relationships. As for differentiation, Sitra is looking to establish branding for its products but consider the two segments in which it operates: their wood-based products segment consists of products like wooden flooring, decking, fencing and doors/windows --- how much differentiation and enhanced margins as a result of branding can come out of them?; the second segment, outdoor furniture, though higher margin and more differentiable, in actual fact only comprises 10% of Sitra's total revenue and was established in the late 1990s. Focus cannot be a competitive strength because the company can hardly be a major or leading player in either of its segments; wood-based products or outdoor furniture are hardly defensible niches.

Consider the growth prospects for the company. Examining the trend of the most recent financials (1Q06 vs 1Q05) in Sitra's prospectus, there is unlikely to be a quantum leap in growth for FY06 over FY05. Consider the IPO proceeds raised. Out of the meagre S$5M proceeds, $1.3M goes to listing expenses, $2.2M goes to working capital and only $1.5M can really be considered as expansion/growth capital. It is unlikely that the IPO will give the company a growth fillip financially.

The industry prospects are not good. Upstream timber prices are rising (the company said as much in its prospectus regarding FY06 prices), meaning margin crimp if companies are unable to pass the costs to their customers (now this is where differentiation would come in useful). Downstream demand could be peaking, given that such wood-based home products and furniture are considered bigger-ticket discretionary expenditure and hence relatively cyclical. It is debatable whether the cycle is peaking, but one could take the cue from the price collapse of HTL.

Given all the pessimistic factors listed above, why has Sitra opened so strongly? The most obvious explanation must be the Chew brothers factor. The management is staffed with members of the Chew clan, including the CEO and COO. The Chew clan also includes Patrick Chew and Chew Hua Seng, bosses of the over-achievers Midas and Raffles Education respectively. So the market is betting Sitra will complete the hat-trick of stock market successes. Is this fundamentally a sound reason? Well, there might be some spillover institutional interest, but the possibility is not great; quoting a mantra of Warren Buffett, where an average sector meets a brilliant management, it is usually the reputation of the former that prevails. Perhaps Raffles Education could provide some creative design guidance on new lines of furniture products from Sitra; that would be the most direct link that I can think of :-)

Poll(please vote)
I agree that Sitra is a hot-stock-not: Yes/No




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