Sam Engineering’s (“SAM”) recently held a corporate presentation which we attended and came out feeling optimistic. SAM is reaping synergistic benefits from the acquisition of an engine casing manufacturing division from SAM Singapore. We have upgraded our FY14E earnings forecast by 27% to account for the full-year earnings accretion from the new engine casing business and introduce our FY15 forecasts when net profit is seen to grow by c.6%. Subsequently, our TP is also raised to RM2.83 (from RM2.28), based on a targeted FYE14 PER of 13.6x (representing a +1.0SD level above the 1-year forward PER mean, for its strong parentage (Temasek) and sustainable growth from aerospace segment). As the TP now offers a decent capital upside of c.11%, we are upgrading SAM to an OUTPERFORM from MARKET PERFORM.

Corporate presentation.  Sam Engineering (SAM) had recently held a corporate presentation which received overwhelming response from investment community. The presentation was hosted by the group’s CEO Jeffrey Goh, Marketing VP Peter Lim and Maestro Capital, its market services adviser. Key highlights of the presentation are as follows:

Transformed into a diversified engineering group. SAM has repositioned itself from a semiconductor player to a diversified engineering group via the acquisition of the engine casing manufacturing division from SAM Singapore back in September 2012. The acquisition boosted the group’s aerospace segment revenue which surged by nearly 400% YoY to RM159.9m in FY13. It is worth noting that although the full earnings of the engine casing manufacturing (post acquisition) were only partially recognised by c.50% in FY13 (given that the acquisition was only completed in the middle of FY13), it had already contributed 35% (c.RM6.9m) to the bottom line and cushioned the earnings shortfall caused  by lacklustre demand in its equipment manufacturing and precision engineering segments. Should we annualise the fullyear earnings contribution from the engine casing manufacturing division (which is estimated to be c.RM14m), the group’s FY13 net profit could potentially hit RM27m or grow +52% YoY.  

Strong order book in the aerospace segment to stabilize group’s earnings. SAM has total outstanding contracts backlog of RM1.2b (or USD400m) in the aircraft engine casing business segment, of which c.RM270m (or USD90m) has been scheduled to be delivered annually until  2016. A more stable market with better visibility, the engine casing contract with a smooth delivery schedule will render the group’s revenue less vulnerable to the volatility of the semiconductor industry.

Growth strategy going forward. Going forward, the group’s outlook will likely be driven by the robust outlook in the aerospace industry as well as more synergistic business acquisitions. SAM, being one of the top five global players in the aircraft engine casing industry, is likely to benefit from the strong aero engines demand wave in view of the rapid delivery schedule in Boeing (a 3.6% CAGR from 2013 to 2032). On the acquisition front, while the  management kept its lips tight on the actual acquisition target, we believe the group is eyeing to expand further in the aerospace segment (with 2/3 contribution  from this segment going forward) and higher-end equipment integration segment.  

Raised TP to RM2.83 with an OUTPERFORM call. We are now more sanguine on the group’s outlook with the synergistic benefits derived from the acquisition of an engine casing manufacturing division from SAM Singapore. Post-meeting, we have raised our FY14E earnings by c.27% to account for the full-year earnings accretion from the new engine casing division. We also introduced our FY15 forecasts when net profit is expected to grow by c.6%. Subsequently, our TP has been raised to RM2.83 (from RM2.28), based on a targeted FY14 PER of 13.6x (representing a +1.0SD level above the 1-year forward PER mean, for its strong parentage (Temasek) and sustainable growth from aerospace segment). As the TP now offers a decent total upside of 11%, we are upgrading SAM to an OUTPERFORM from MARKET PERFORM.

Source: Kenanga