FY08 and FY09 earnings downgraded on higher costs and subdued sales growth as economic conditions deteriorate.

Transview’s 1H08 net profit fell 4% on a 6% rise in revenue to S$0.8m and S$15.29m respectively. The rise in revenue was mainly attributed by the increase in retail revenue from higher sales in Malaysia, and wholesale revenue from Indonesia due to higher demand and inventory replenishment.

The top line growth was in line with expectations but pressure on margins from higher rental expenses in Singapore which rose 19% and staff costs which rose 11%, contributed to the fall in earnings.

Transview has benefited from a stronger S$ against the Yen but this improved margin has been offset by increased competition on the golf club market especially from brands such as Taylor Made which has put some downward pressure on the selling prices of their brands.

We expect little contribution from its planned expansion into the Middle East in FY08 and FY09 as they have not found or appointed business partners for the region. This cautious and prudent approach is to be commended given the uncertain global economic situation.

Based on the trend observed from previous years, the second half performance is expected to be better than the first half as it usually accounts for about two-thirds of annual revenue and profit. Notwithstanding this and taking into account the weaker first half, we are revising down our FY08 net profit forecast from S$2.66m to S$2.3m; and our FY09 net profit from S$3.13m to S$2.6m.

Over the six months to April 30, 2008, Transview’s NTA fell from 15.9 cents to 15.6 cents from a decline in their translation and revenue reserve due to a stronger SGD.

Since our report on January 23, 2008, the share has risen by 14.3% despite a 2.8% decline in the Straits Times Index. However, given the deteriorating economic outlook in the region and rising cost pressures, we are of the view that the risk to earnings downgrade has increased from weaker sales and higher costs. The share is now trading at a small discount in PER terms to the Straits Times Index following the recent derating of the Singapore stock market which would limit further upside performance. Therefore, notwithstanding that the share is supported by its long term DCF value of $0.20, we are downgrading our Buy recommendation to a Hold.