Net profit up 76.2% attributable to maiden contributions from the 80% stake in Brilliant Time Limited

• As Brilliant Time Limited (BTL) had became the Group’s 80% owned subsidiary with effect from 19 January 2008, 1Q08 revenue growth surged 151.6% yoy to HK$19.72m due to line by line consolidation of BTL’s revenue. Correspondingly, net profit attributable to shareholders increased 76.2% yoy to HK$2.58m. Factoring out the contributions from BTL, top line growth from the Group’s core operations remained largely flat at circa HK$7.85m and profit before taxes actually declined due to a share based payment of circa HK$2.5m from the granting of staff options in November 2007.
• Revenue contribution from the group’s 80% stake in BTL consisted of both the provision of IT services and the sale of IT equipment. These came up to approximate amounts of HK$4.1m and HK$7.8m respectively. After factoring in the cost of sales and other operating expenses, profit before tax pertaining to BTL was circa HK$4.4m. Going forward and based on 1Q08 results, the visibility of the HK$20.0m profit guarantee could be seen for FY08.
• We continue to view the IT consulting industry as very challenging due to the evolving competitive landscape brought about by international vendors. Unless the group can secure more sizeable contracts or contracts that can generate substantial, recurring income, top line growth is likely to decline going forward.
• Contributions from BTL are factored into our FY08 revenue and net profit estimates. We revised our revenue target downwards and increased our net profit estimates due to lower than expected integration costs. Using a 3-year average recurrent free cash flow (RFC) method with the required yield at 10%, we peg the fair value of Armarda at S$0.108 which offers limited upside potential from the current share price of S$0.10. We upgrade our recommendation from “Sell” to “Hold”.

Financial Position

Balance sheet of the group remains strong with zero gearing. Net cash on balance sheet (cash net of all liabilities) stand at circa HK$69.6m, or S$0.0316 a share. This translates into 33.3% of current market capitalization.

In 1Q08, both asset turnover and operating margins improved due to the contributions from BTL.Going forward, we expect ROE to be maintained at current levels.

Valuation and recommendation

Our FY08 revenue and net profit estimates are HK$83.55M and HK$19.1m respectively (previous estimates at HK$93.8m and HK$19.6m). Our net profit estimates are revised upwards due to better than expected cost synergies brought about by BTL.The Group’s operations are valued using a 3-year average recurrent free cash flow (RFC) method with the required yield at 10%. Our estimate of dividendable cash is maintained at HK$33.83m. This is reasonable given that net cash on balance sheet is circa HK$70m.

Armarda is trading at an ex-cash PER of 7.9x based on our forecasted FY08 earnings and our RFC valuation pegged the fair value of the Group at S$0.108. At the current share price of S$0.10, the counter offers limited upside potential and we upgrade our recommendation to “Hold”.