Interior fit-out specialist, Design Studio, stands to benefit from the growth of new hotels in Singapore and its key markets (Malaysia and UAE), but fewer new private residential properties in Singapore would dampen revenue growth somewhat. Nonetheless, FY12 revenue is expected to record good growth, largely attributed to the acquisition of DDS (previously associate company). Its China expansion plans could also contribute to growth going forward. Its healthy order book (S$266.7m, +78% YoY) coupled with its strong balance sheet (net cash of 6.5 S''/share) puts it in a good position to take on growth opportunities. Design Studio has been paying at least 25% of earnings over the past few years, translating into a yield of 4.8% at current levels. It last traded at FY11 P/E of 8.7x, P/B of 1.4x. We do not have a rating for this stock.

Acquisition enhances hospitality and commercial segment. Design Studio acquired its associate company, DDS in 1Q12. DDS' strength lies in the hospitality and commercial space in Singapore, Malaysia and Thailand. Past projects include the two Singapore IRs. DDS has secured contracts for ID fit-out works for upcoming new hotels in Singapore, such as the Westin Singapore Marina Bay. As more upscale hotels look to open its doors in Singapore, with its capabilities, Design Studio is positioned to secure the ID fit-out contracts for these establishments.

China, another wing for growth. Design Studio expanded into China with two manufacturing facilities in Huizhou, and a 40,000 sq ft showroom in Dongguan. It plans to have a series of showrooms-cum-sales offices across key Chinese cities, which would raise Design Studio's visibility and brand awareness, allowing it to ride on the still-growing Chinese residential property segment.

Enjoys better margins vs peers. At its last done price of S$0.52, Design Studio traded at 8.7x FY11 P/E (peer: 8.8x). Design Studio enjoys better EBIT margins compared with peer, but its peer has a better ROE. We note that Design Studio has a low trading liquidity and public float is a mere 10.2%.

A specialist in the manufacture, distribution and installation of customised furniture products. Design Studio has three main core business segments ' (1) residential property projects (where it manufactures, supply and installs paneling products); (2) hospitality and commercial projects (where it doe interior fit-out services); (3) distribution (where it distributes imported brands, locally). Its operations span across South East Asia, Middle East, the US and China.

Strong portfolio of projects under its belt. Its capabilities and close relation with the developers have enabled it to build up a portfolio of landmark residential projects. It is also engaged in the development of high-profile projects in Malaysia, Thailand and the US. Residential projects include Reflections @ Keppel Bay and Gilstead Two in Singapore; Five Stones in KL, Malaysia; Urbano Absolute in Thailand; and Rihan Heights in UAE. Design Studio also provides ID solution for the hospitality and commercial sectors. It has completed fit-outs for hotels and resorts as well as commercial establishments in Singapore (e.g. MBS, Equarius Hotel, Asia Square Food Garden). On the international front, Design Studio has completed fit-out for establishments such as Grand Hyatt, KL and Crowne Plaza, Abu Dhabi. With such a portfolio, Design Studio is in a good position to secure new clients or ride along existing clients' regional expansion.

Acquisition is a timely move. To further enhance its capabilities in the hospitality and commercial segment, Design Studio acquired DDS early this year. Design Studio is seeing a reduction in the number of residential projects taken on, largely due to a slower rate of
new launches amid the government's cooling measures. Hence, the acquisition of DDS is timely, as it could offset the decline from the residential segment, and add to overall revenue growth.

An attractive partner for distribution of furnishings. Its network and relationships with the developers make Design Studio an attractive partner for brands looking to distribute their home furnishing systems in Singapore. It has distributorships from SieMatic (a luxury kitchen brand from Germany) and Corian'' solid surface materials, and it has supplied to projects such as Nouvel 18 and Martin Place Residences.

Proprietary brands reduces reliance on principals. It has Panelz, which offers clients a range of customised furniture, including doors and frame, kitchen and vanity cupboard as well as wardrobe systems. iFormz, its brand of solid surface material, is made with Corian'' solid surface materials, and offers clients a more affordable alternative to quality finishing.

Developers optimistic about opportunities in China. Some developers remain positive over China's residential property market. Hence, with showrooms and sales offices across China, Design Studio would be able to reach out better to developers and ID consultants there. Should this strategy work out well, it would be able to drive growth.

Strong balance sheet. Its cash flow from operations was worse off in 2Q12 compared with 2Q11. This was largely due to increase in inventories for its Huizhou factory as well as consolidation of receivables and payables from DDS. Management indicated that credit
terms for some DDS' clients are longer. Notwithstanding that, Design Studio has a strong balance sheet with net cash position of 6.5 S''/share at end 2Q12. This would allow Design Studio to take on strategic growth opportunities that may come its way.

Valuation is probably limited by trading illiquidity. While not entirely comparable, Design Studio's closest SGX-listed peer would be Kingsmen Creatives. Design Studio last traded at 8.7x FY11 P/E (Kingsmen: 8.8x). We note that Design Studio enjoys better EBIT margins, as hospitality and commercial projects generally command higher margins. However, Design Studio has a lower ROE than its peer. Trading liquidity for Design Studio is also rather low (with no trades on some days consecutively) and the public float is only 10.2%.

Source: OSK