DS has successfully transformed itself from a local furniture manufacturer to a global product specialist with in-house brands. It is poised for a quantum leap given the strong demand for hotel fit-outs, growing overseas traction and potential mega contract wins. Despite its robust growth momentum, valuation is a steal, at just 3.9x (ex-cash) FY10 PER, a sharp discount to its peers!

DS outshines its peers with the successful creation of in-house products and exclusive distributorship of renowned international brands. Besides achieving better margins, its in-house brands offer customisation and competitive pricing that are well sought after globally. With leading developers such as City Dev and SC Global as repeat customers, DS is poised to benefit from the recent pick up in private residential launches.

To prepare for the debut of the IRs, many existing hotels are rushing to refurbish their rooms to capture rising demand and premium room rates. With a decade of experience in fitting out hotel rooms, DS will be a prime beneficiary of this immediate demand surge. Earnings from hotel fit-outs, which have yet to be factored into our forecast, could potentially double DS’s earnings over the next 12 months.

The recent 45:55 joint-venture (DDS) with Depa from the Middle east will accelerate DS’s global expansion. By combining the group’s expertise in Asia with the strong financial and manpower resources of Depa, the JV has garnered big orders worth $137m within a year. This JV offers tremendous earnings upside, as it acts as a springboard for the group to clinch mega projects potentially worth many times of its market capitalisation.

While valuation is a steal, the stock offers good exposure to the IRs, buoyant residential property sales and fast-growing overseas markets like the Middle East. Moreover, attractive dividend yield of above 5% adds to its appeal. With a 59% price upside potential to our target price of 78 cents, we are initiating coverage on Design Studio with a BUY.