Jaya’s 2Q09 headline net profit of S$26.7m was above expectations, mainly due to vessel disposal gains more than offsetting large forex losses. Looking ahead, financing issues on its aggressive newbuild program and uncertainty surrounding its forex hedging positions will continue to be a drag on share price performance. Maintain Fully Valued.

2Q09 better than expected. Jaya’s 2Q09 headline net profit of S$26.7m (-17% y-o-y, +193% q-o-q) came in above expectations, even after accounting for a significant forex loss of S$31.7m. This was due to an unexpectedly large gain from vessel disposals of S$39.7m, and a S$2.8m unrealized gain on derivatives. Excluding the unrealized amounts, net profit would have come in at S$25.9m (-13% y-o-y, -43% q-o-q). Group revenue fell to S$37.8m (-49% y-o-y, -43% q-o-q) primarily due to the shipbuilding division recording lower progressive recognition on fewer vessels committed for sale, while gross margins improved significantly y-o-y to 55.6%, reflecting the higher value charter vessels. Jaya has also declared an interim dividend of 1.0 Scents per share.

Net gearing expected to step up further. While management has indicated that it will continue to pace its aggressive newbuild program to balance capex requirements against cash flows generated from its chartering operations and vessel disposals, we project Jaya’s net gearing to step up to 0.92x by end FY09, from 0.65x currently. This is after having assumed a 20% delay in its newbuild program.

Maintain cautious stance on Jaya. Despite raising our FY09 net profit forecast to S$61.9m to account for the larger than expected vessel disposalgains posted in 2Q09, we are maintaining our Fully Valued recommendation on Jaya. Financing concerns on its large capex program have yet to ease, while uncertainty surrounding its forex hedging positions will continue to be a drag on share price performance. Our TP of S$0.23 is unchanged, and is based on 0.45x FY09F P/B, in line with historical trough valuations.