1. Excellent Result

Last Friday, Sam Engineering released its financial result for the quarter ended 31 December 2019.

Key observations :

(a) EPS at all time high of 19.3 sen.

(b) Aerospace revenue is flattish at RM123 mil, but Equipment revenue registered a huge jump from RM90 mil to RM156 mil (73% jump Q-o-Q).

Accordingly, segmental profit for Equipment division jumped by 100% from RM10.8 mil to RM21.6 mil. Aerospace division's segmental profit remains more or less the same Q-o-Q.

(c) Minimal exceptional items. What we see is what we get.

2. Result Commentaries

As shown above, it is pretty straight forward : higher revenue contribution from Equipment division leads to higher PBT.

3. Outlook

Revenue contribution from Aerospace division is expected to drop going forward as Boeing has suspended production of 737Max beginning January 2020. In August 2019 AGM presentation slides, the Company mentioned that 737Max accounted for <10% of yearly revenue. If that is the case, how much will be the impact on profitability ?

Based on past 12 months figures (October 2018 until September 2019), total group and Aerospace division revenue was RM792 mil and RM471 mil respectively. A 10% drop in group revenue is equivalent to RM79 mil decline. Meaning Aerospace division revenue will drop from RM471 mil to RM392 mil. That is a drop of 17%.

Assuming the same impact on PBT, Aerospace division's PBT is expected to decline from RM50.7 mil (October 2018 until September 2019) to RM42 mil, a drop of RM8.6 mil, or RM2.2 mil per quarter. Accordingly, we can expect Aerospace division's PBT in coming quarter to drop from RM12 mil to RM9.8 mil (a drop of RM2.2 mil per quarter).

Based on assumption that Equipment division maintains same profitability (in previous articles, I mentioned that I believe semicon upswing can last for few years due to 5G), its PBT will be RM21.6 mil.

Adding the two together, total PBT will be RM9.8 mil + RM21.6 mil = RM31.4 mil. Based on tax rate of 22% (same as this quarter), net profit will be RM24.5 mil. Based on 135.2 mil shares, EPS of 18 sen (a drop of 1.2 sen from current quarter).

If annualised, can expect full year EPS of 72.4 sen. Based on current price of RM7.50, prospective PER is 10.4 times.

To arrive at Target Price, I will leave it to you to decide what PER to apply. For comparison purpose, its peers Dufu, UWC, Greatec, MI Technovation etc are all trading at PER of more than 25 times.