Sam Engineering - Headwinds ahead

Period    2Q13/1H13

Actual vs.  Expectations

 The group’s 1H13 net profit (NP) of RM9.9m came in largely in line (c.47% of our estimate) although the revenue only made up of 34% of our full-year  estimate of RM501.1m. 

Dividends   Declared a gross first and final dividend of 7.46 sen, with the entitlement date to be announced later. 

Key Result Highlights

 YoY,  SAM’s 1H13 revenue dropped by 33.1% to RM171.0m due to lower demand on its equipment manufacturing segment (-39.3%), which was partially offset by higher growth in its precision engineering segment (+3.2%). The sharp drop in the equipment manufacturing segment was mainly due to lower sales from hard disk drive test equipments in line with the weaker semiconductor industry trend. The EBIT margin, however, improved to 6.9% (1H12: 3.9%) as a result of better cost control. This has led the group to record a higher NP of RM9.9m (+23.4%).

 QoQ, SAM’s 2Q13 revenue was lower by 56.1% due mainly to lower sales from the Equipment Manufacturing segment (-66.9%), which was again partially offset by the flat growth in the precision engineering segment (+0.2%). The group’s 2Q13 EBIT margin fell to 3.1% (1Q13: 8.6%) due to a higher operating cost and a lower turnover. Meanwhile, the effective tax rate has risen to 40.9% (1Q13: 9.3%) as a result of lesser tax incentives received, leading the group to report a lower NP of RM0.9m (-90.2%).

Outlook   Although the 2H is normally the group’s stronger quarter, 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 more resilient aerospace industry is expected to provide stability to the group’s earnings.

Change to Forecasts

 We have lowered our FY13-FY14 sales forecasts by 23.6%-26.8% to RM383m and RM428m respectively, after reducing our equipment manufacturing segment sales assumption. We have also raised our GP margin to 9.0% from 8.2% previously. On the overall, FY13-FY14 NPs have been revised lower to RM18.1m (-14.2%) and RM21.5m (-19.5%), respectively.   

Rating  Maintained MARKET PERFORM 

Valuation    We have lowered our TP to RM2.68 (from RM2.80 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 and is pegging a market PER of 15.0x for its aerospace engine casing business division.

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

Source: Kenanga