Sam Engineering (“SAM”) - 9M13 results in line with expectation

 Period    3Q13 / 9M13

Actual vs.  Expectations     SAM’s 9M13 net profit (NP) of RM13.6 came in within our expectations, making up 75% of our full year  estimate. Similarly, its 9M13 revenue of RM273.6m was also largely in line (71%) with our full year estimate.

Dividends   No dividend was declared during the quarter under review.

Key Result Highlights     YoY,  SAM’s 9M13 revenue dropped by 24.9% to RM273.6m despite the new sales recognition in its Aerospace segment following the acquisition of Avitron Private Limited at the end of 2Q13. The main culprits were the prolonged lacklustre demand at its equipment manufacturing segment (-49.2%) as well as precision engineering segment (-38.1%) amid the weaker semiconductor industry trend. The EBIT margin, however, improved to 6.3% (9M12: 3.5%) as a result of better cost controls. This led the group to record a higher NP of RM13.6m (+10.9%).

 QoQ, SAM’s 3Q13 revenue soared by 96.7% as lower sales from the Equipment Manufacturing segment (-20.9%) due to weaker sales of HDD test equipment was offset by the increased sales in the Aerospace segment following the acquisition of Avitron Private Limited at the end of 2Q13. The group’s 3Q13 EBIT margin climbed to 5.4% (2Q13: 3.1%) due to lower operating expenses coupled with a higher revenue growth. Meanwhile, the effective tax rate was lower at 24.6% (2Q13: 40.9%) as a result of tax incentives received, helping the group to report a higher NP margin of 3.7% (2Q: 1.7%)

Outlook   Although the 2H is normally the group’s stronger period, the prolonged global economic uncertainties may continue to weigh on the earnings visibility of the technology industry. This will indirectly and directly affect the growth of the group. 

 However, its more resilient aerospace earnings is expected to cushion the group’s earnings from the adverse factor above.

Change to Forecasts    No changes to our earnings forecast post the 9M12 result.

Rating    Maintain MARKET PERFORM 

Valuation    Our TP has been lowered to RM2.54 (from RM2.68 previously) based on a SOP valuation methodology. We expect the group’s FY14 net profit to achieve RM21.5m, of which RM6.7m will come from its equipment manufacturing business segment and RM14.8m from the full year earnings impact of the aerospace engine casing business.

 We value its equipment manufacturing business segment at the industry’s average PER of 7.0x. We, however, lowered the targeted aerospace engine casing business division PER to 14.2x (~5% discount from 15x previously), in line with the FBMKLCI forward PER, to account for the higher volatility in the market.

Risks   Fluctuation in foreign currencies and the cyclical nature in part of its businesses.

Source: Kenanga