CNA Group: Update on Middle East receivables (DMG)

(SELL, S$0.154, TP S$0.14)

CNA’s 2Q11 net profit was in line at S$0.4m, down 81.3% YoY, mainly attributable to the absence of contribution from its associate Standard Water Ltd (SWL), which was sold in 3Q10. We note signs of CNA turning around - 2Q11 revenue has grown 11.7% YoY, 15.7% QoQ and a S$0.8m profit from 2Q11’s operations (+95.5% QoQ) versus a loss of S$0.6m last year. An update on its Middle East (ME) receivables - CNA has initiated arbitration proceedings for the S$43.4m receivables outstanding on the Dubai racecourse project. It had made provisions of ~16% of the outstanding receivables so far. Following the share placements to Mitsui and Mitsubishi, CNA’s balance sheet is strengthened and it is tapping on their businesses/network to expand. However, in the absence of a strong near-term catalyst, investors will probably take a while before revisiting this stock. Maintain SELL recommendation, with a TP of S$0.14, based on 11.9x FY11 earnings (its 6-year historical average).

2Q11 in line with expectations. 2Q11 earnings was in line, down 81.3% YoY at S$0.4m, in spite of a 11.7% YoY growth in revenue (arising from growth in Singapore, China and Vietnam). This is mainly attributable to the absence of contribution from its associate, SWL, following its disposal in 3Q10. On a positive note, 2Q11’s profit from operations came in at S$0.8m, up from a loss of S$0.6m a year ago and almost doubled QoQ.

Arbitration for Middle East receivables. CNA has initiated arbitration proceedings for the S$43.4m still outstanding pertaining to Dubai’s Nad Al Sheba Racecourse for Meydan LLC. In FY09 and FY10, CNA had already made provisions totalling ~S$7m (~16% of S$43.4m) with regards to the receivables. It is unclear at this stage whether any additional provision will be made. In terms of the legal procedures, arbitrators from both parties would be appointed and once arbitration commences, it may take as long as 18 months to resolve the dispute.

No change to our estimates. Order books have grown from S$47.6m as at Jun 10 to S$73.4m currently, to be fulfilled over the next 18 months. This is an encouraging sign and hence, we continue expect to see growth in CNA’s topline in upcoming quarters.