ENG (FV RM2.00 - NEUTRAL) 1QFY12 Results Review: Tilting Into The Black

Engtek returned to the black with 1QFY12 core earnings of RM0.2m (+102% q-o-q, -96% y-o-y), after stripping  out  one-off gains amounting to RM16.6m.   With the gradual recovery of its Thai operation, the company should perform even better in the forthcoming quarters.  Hence, we are revising  upwards  our FY12/FY13 core earnings forecasts  by 38%/16% to  include  higher HDD components production but are retaining our FV at RM2.00. This is pegged to the company’s proposed net assets acquisition offer price. Maintain NEUTRAL, with a slim upside.

Production rerouting boosts  top-line, but not quite.  As a  sign of recovery, Engtek returned to the black  with  core earnings  of  RM0.2m (+102% q-o-q,  -96% y-o-y) on stronger quarterly revenue, which grew sequentially by 50% to RM102.9m (-15% y-o-y). However, it did not revert back to  its  pre-flood operating capacity. We suspect the company only  benefited  solely from higher average selling prices (ASPs)  for its HDD mechanical components.  In the prior quarter, Engtek  had  shifted production  to  its manufacturing plants in Johor and Philippines while the Thai plants were being  rebuilt.

These efforts are scheduled for completion in 3QFY12. Thus, owing to its relatively high operating leverage, the company logged in gross profit margin of 9%, which is still lower than the  pre-flood levels in the mid-teens. Nonetheless, we expect  a more meaningful increase in Engtek’s production volume from 3QFY12 as its Thai operation recovers and help lift overall profit margins.

No progress in  the proposed net assets acquisition. There have been  no changes so far to TYK Capital’s offer of RM2.00/share to purchase Engtek’s net assets. The EGM being called to obtain shareholders’ approval is slated for 12 June. We understand that there was an extension of  the  offer  period  by another 3 months to 18 Aug in order to obtain the High Court’s approval on the distribution of the cash proceeds arising from the disposal. Nevertheless, we view this as  a mere formality and should not  hinder the completion of the takeover.

Maintain NEUTRAL at RM2.00.  Given that we  had  earlier expected Engtek to experience  two consecutive quarters of losses, we deem its 1QFY12 financial results above our estimates. Hence, we are revising  higher  our FY12/FY13 core earnings forecasts by 38%/16%  respectively  to factor in  higher  HDD components  production. Despite this, we are retaining our fair value (FV) at RM2.00, pegged to the proposed net assets acquisition offer price. We think that the offer price is still attractive since it is at a close to 20% premium to the counter’s historical 5-year average of 0.9x P/NTA.

Source: OSK