We highlight some of Chartered’s key debt covenants as stated in its last annual report. We believe these are key watch points in light of the currently difficult operating conditions. Underperform rating maintained.

There are two items worth highlighting: first, Chartered needs to maintain a net worth above US$1bn with net gearing less than 180%; and second Temasek (a 59.4% shareholder) needs to maintain a certain percentage of ownership or remain the single largest shareholder of the company.

30-40% utilisation is bad news: Our scenario analysis indicates that if Chartered’s overall utilisation stays in the 30–40% range for the rest of the year, it could report a net loss in the region of US$700m (with a cash loss of about US$200m). This could bring down its net worth to just above US$1b and its net gearing would be very close to breaching 180%.

Looking at both debt and equity: Chartered's EV of about US$1.9bn is about 75% debt and 25% equity. Thus, the sharp move in recent days is really the amplification of the smaller part of it EV makeup. While Chartered’s valuation at a historical low P/BV of 0.3x (which would be attractive for a potential acquirer), under current conditions, the potential acquirer’s consideration could be the entire EV rather than just Chartered’s market capitalisation. A change in control could also bring about changes to its credit rating or availability.

Strategic investor the best bet: With the other foundries also struggling with excess capacity, a strategic investor would be our best guess should Chartered need to consider a meaningful equity issuance. Most interesting to us would be a link to the Mudabala Development Company, which acquired AMD’s fabs last year. More details in our ’Abu Dhabi’ joins the foundry party note, dated 7 Oct 2008.

12-month price target: S$0.20 based on an EV/EBITDA methodology. Catalyst: A wider net loss beyond the US$116m we currently expect for FY09. Our target price of S$0.20 implies valuation ratios of FY09E EV/EBITDA of 3.0x and P/BV of 0.2x. Underperform rating maintained.