Khong Guan

Khong Guan Flour Milling Limited

The Company was incorporated as a private company on 19 August 1960. It obtained public status on 21 January 1969. Established as a milling company, it has now ceased the milling of wheat flour and corn grit and is now principally engaged in the trading of wheat flour and other edible products. It is also an investment holding company.

Net income has in 2007 to 2005 has increased over the 3 years. Profit was up 270% in 2007 as compared to 2005. United Malayan Flour (1996) Sdn Bhd, a 30% equity held associate, reported a profit after tax of S$3,671,000 (2006 : S$2,650,000) on a turnover of S$78,882,000 (2006 : S$86,251,000). The higher profit was substantially due to the upward revision of the controlled wheat flour price for non-general purpose flour. This was augmented by the lower cost of wheat grains purchased through forward purchase contracts.

Valuation

Scenario 1

From 2001 to 2007, Singapore economy has experienced a change in economic growth, from the economic recession in 2001 to the recovery in 2003-2004 and the boom from 2005 to 2007. The average result is indicative of the result expected in future business cycle.

As of present, based on current economic characteristics, the estimated worth of the company is S$4.30 per share.

Scenario 2

Allowing for a conservative growth of about 4% for next 3 years may not seem too speculative.
Using the above conditions, the company will be estimated to worth about S$ 5.00 per share.


Recommendation

Valuation

Khong Guan has achieved an EPS of 33.74cts. As of 20th July 2007, at S$3.60, Khong Guan is trading at a PE of 10.66x.

If Khong Guan is to trade at PE of 15, Khong Guan will worth $5.07.

If we were to assume a growth of 5%, then Khong Guan will worth $5.40.

Moreover, Khong Guan is able to achieve a positive cash flow of S$5 million in 2007. This is also possible in coming years.



Conclusion
It is recommended to have buy rating for Khong Guan for now.