KIM ENG RESEARCH, Oct 13

BASED on our recent meeting with management, we are more confident about the prospects for the company. We could expect bumper dividend pay-out by FY07 because of Sincere's substantial Section 44 tax credits. A potential scrip dividend pay-out of up to $17.5 million or $0.089 per share implies an attractive 10.7 per cent yield, excluding the usual payout.

Sincere has further leveraged on its expertise as a luxury watch retailer by recently launching its premium concept boutique called Haute Horlogerie, which showcases exclusive customised time-pieces solely for the Singapore market. Its expansion drive is also on track with an additional high-end watch outlet in Vivo City and at least two new boutiques in Singapore and Malaysia next year. Contributions from north-east Asia are likely to remain robust due to strong consumer demand.

In Singapore, the luxury watch market remains firm amid rising consumer interest in fine jewellery and watches. Peers operating in China are already attracting investment interest as evident in the premium valuations of luxury goods retailer Xin Yu Heng Deli, which trades at 28.7x FY07 PE.

Q107 net profit fell mainly because of unrealised forex losses of $4.5 million. Excluding the forex losses, Q107 Ebit (earnings before interest and tax) would have been a growth of 9.8 per cent or double from last year's results. Actual realised forex losses are minimal thus far, at less than 0.3 per cent of group turnover. As forex fluctuations generally affect the whole industry, we should focus on Sincere's core earnings which have been resilient.

Currently, Sincere trades at an undemanding 7x FY07 PE, the lowest among its peers. Its valuation is relatively attractive given its high pretax margin of within 8-10 per cent and ROE (return on equity) of above 20 per cent for the past five years. We pegged our valuations estimate to 9x FY07 EPS (earnings per share) and derived a fair value of $1.05, representing a 26 per cent upside potential. Maintain 'buy'.
BUY