Weakness persisted in 2Q09. Koda Ltd's (Koda) 2Q09 results were below expectations. Revenue slipped 34.2% YoY (but grew 2.5% QoQ) to US$11.8m, while net profit slumped 85.6% YoY and 18.7% QoQ to US$0.3m. Weak demand was the key culprit for the weak revenue showing. While we were spot on with our revenue estimates, earnings fell behind as high fixed costs persisted despite slowing sales. What caught us by surprise was the absence of dividends - typically paid twice a year - given Koda's strong cash position. Management explained that the decision was driven by priorities of cash conservation and possible M&As.

Margins came under pressure. Profit margins declined during the quarter as a result of pressing raw material costs and fixed overheads expenses. Gross profit margin slipped 4.5ppt to 26.2%, and net profit margin shrank by 10.1ppt to 2.8%. Although commodity prices have generally fallen, the impact has yet to be felt by Koda due to time lags between contractual negotiations and actual implementations. We do not expect cost pressure to ease significantly in the coming quarter as management has hinted at limited avenues for cost cutting.

Not out of the woods yet. Moving into its seasonally weakest 3Q09, the situation is likely to remain bleak. Management has warned that it could slip mildly into the red as a result of the shorter working months and festive holidays during the quarter. In addition, its newly expanded plant in Vietnam will add create overcapacity and under utilization. As it is, its plants are already running at less than 50% utilization rate.

The silver lining. On a brighter note, the US market is starting to show signs of a revival. Inventories have been depleted and orders are starting to flow in again. The impact of these orders could be felt in 4Q09 or 1Q10. On the other hand, the crisis has just begun in Europe and UK, implying that these markets could experience further weakness before staging a cyclical recovery. We have cut our earnings estimates by 27% to 50% to account for the weaker-than-expected 1H09 results. In addition, we have trimmed our valuation to 0.5x FY09F NTA from 0.6x, bringing our fair value estimate to S$0.145 (previously S$0.185). The bleak outlook appears to be factored in at current prices, as such, we maintain our HOLD rating on Koda.