Lower sales from marine segment, but better margin: Aqua-Terra Supply ("ATS") could have delivered a stronger set of results if it had not ventured into shipbuilding projects classified under marine segment. The costs overruns of those projects resulted in S$6.6m losses. We expect sales in marine segment to decline by about 20% in FY09 as fewer vessels will be delivered during the year. Nevertheless, GPM for the segment is expected to improve due to proportionately smaller contribution from the loss-making business.

Growth in oil and gas segment to offset the decline in marine segment: We expect oil and gas segment to jump 15%, due mainly to increasing contribution from investment in China, particularly Bohai Bay oil field. The segmental GPM is expected to hover at 20-25%.

7% dividend yield: ATS has declared a final dividend of 0.45 Sg cts per ordinary share, compared to 0.50 Sg cts in previous year. Combined with interim dividend, the full year DPS in FY08 was 0.80 Sg cts, representing approximately 7% yield. Although no official dividend policy has been stated by ATS, we believe management adopts targeted payout ratio of 20%, based on its history record of dividend payout.

Cautious on cash flow, should see improvement in FY09: We are cautious in terms of earnings quality as cash flow from operation has been in negative territory for consecutive two years. Particularly in FY08, inventories increased a hefty S$22.7m, leading to negative operating cash flow of S$10.3m despite much betterment in earnings. Nevertheless, the huge cash outflow is understandable given that the elevated working capital requirement was the direct impact from rapid expansion experienced by the firm over the past few years. We therefore expect a better cash flow in FY09 as growth going to be subdued and no major capex being budgeted this year.

Maintain BUY recommendation with price target of $0.13: ATS is expected to deliver a relatively stable set of results despite facing a steepening economic downturn. The counter is trading at attractive valuation, 3.0x FY09 PER and 0.3x FY09 PB. Downside will also be limited by sustainable dividend payout. We prefer to be conservative on valuation front by pegging 3.5x PER FY09 to derive a target price of S$0.13.