Monday 3 September 2012

SAM Engineering - A slower growth outlook ahead


Period  1Q13

Actual vs. Expectations The 1Q13 earnings of RM9.0m accounted for 32.4% and 39.0% of the street and our full year estimates of RM27.8m and RM23.1m respectively. While the group’s bottom line came in above expectations, its top line of RM118.8m was within the street and our expectations, which accounted for 19.2% and 21.5% of the street and our full year numbers of RM617.5m and RM552.1m respectively.

Dividend             No dividend was announced during the quarter.

Key Result Highlights
YoY, the group’s revenue increased 15.5% to RM118.8m vs. RM102.9m in 4Q12, thanks to the stronger demand in HDD test equipment, which increased its Equipment Manufacturing segment revenue by RM14.1m to RM99.6m in 1Q13. The bottom line recorded a net profit (NP) of RM9.0m vs. RM3.7m a year ago due to the higher revenue, lower cost and a forex gain of RM1.6m.

QoQ, the revenue was lower by 28.7% due to lower sales from the Equipment Manufacturing segment (-31.8%) and Precision Engineering segment (-7.6%) as opposed to 4Q12 when the quarter saw strong recovery in the HDD industry from the Thai flood. The NP, however, increased by 12.2% to RM9.0m vs. RM8.0m in 4Q12 due to the stronger USD, a more favourable sales mix in the Equipment Manufacturing and Precision Engineering segments and lower costs for start-up projects.

Outlook                               Although the 2H is normally the stronger quarters, the global financial and economic uncertainties may affect the earnings and growth visibility of the semiconductor and HDD industries. This will indirectly and directly affect the growth of the group.

However, the aerospace industry is expected to provide stability to the group’s earnings.


Change to Forecasts       Revised down our FY13-14E NPs by 8.7%-11.6% to RM21.1m-RM26.7m due to the normalisation of HDD test equipment demand after the Thai flood, the slowdown in equipment spending growth in the semiconductor industry, which is expected to be cushioned by the aerospace industry.


Rating   Downgraded to MARKET PERFORM
This is because the stock now offering only a 10% in potential total return and coupled with weaker earnings outlook.


Valuation            Downgraded our TP to RM2.80, based on a SOP valuation methodology. We expect the group to register RM26.7m in FY14, of which RM11.6m coming from its core business and RM15.1m from the full year earnings impact of the aerospace engine casing business.

We value its core business with an industry’s average PER of 7.0x and peg a market PER of 15.0x for its aerospace engine casing business division.


Risks      Fluctuation in foreign currencies and cyclical in nature.


Others
Note that the group has a total ICULS outstanding of RM135m and assuming a 20% conversion for each of the next 5 years, the number of shares factored in our calculation of the diluted earnings per share numbers are 6.4m and 12.9m for FY13 and FY14 respectively.

Source: Kenanga

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