Slipped into the red. Koda's 3Q09 earnings came in below expectations. The group slipped into the red with a net loss of US$1.0m during the quarter vs. a net profit of US$0.5m a year ago and US$0.3m in 2Q09. Losses in 3Q09 alone wiped out its 1H09 earnings and dragged the group's 9M09 bottom line into a net US$0.2m loss. 3Q09 revenue fell 33.3% YoY to US$6.5m on weak consumer demand. Sales in UK and Europe plunged as consumers reined in on spending and property markets remained subdued. On a brighter note, sales from America and Canada have somewhat stabilized and inventory re-stocking has helped to fuel demand.

Contraction in profit margins. Profit margins deteriorated at all levels in 3Q09. Gross profit margin slipped 3.6ppt YoY to 26.4% as consumers shunned premium products for more economical alternatives. EBIT swung into a US$1.0m loss from a US$0.7 profit a year ago as operating expenses continued growing despite lower turnover. In particular, administrative expenses grew 14.0% to US$1.5m as the group incurred additional costs in relation to the setting up of its Vietnam plant. According to management, most of these are fixed costs and will persist in the coming quarters.

Balance sheet and cash flow remain healthy. Weak earnings aside, Koda has maintained a healthy balance sheet with net cash position. Operating cash inflow improved to US$0.8m from US$0.2m a year ago on lower working capital investments. Free cash flow turned into a positive US$0.2m inflow from a US$1.2m outflow as the group scaled back on its capital expenditure budget. The group's conservative credit policy has helped it to avoid major write-downs, and this should help it to tide through the credit crisis relatively unscathed.

Maintain HOLD. We have lowered our sales and earnings estimates to take into account Koda's weaker-than-expected 3Q09. Nevertheless, we expect 4Q09 results to improve on inventory replenishment. While we project a modest US$0.3m profit for the year, we note that the group's profitability hinges on its customers' timely acceptance of shipments. Any order delays will hurt the group's revenue and could threaten to throw earnings into the red once again. We rollover our valuation to FY10F NTA and keep our peg at 0.5x, deriving an unchanged fair value estimate of S$0.145. We maintain our HOLD rating on the stock.