Period  1Q14

Actual vs. Expectations  The group reported a 1QFY13 net profit (NP) of RM2.4m which only made up 8.5% of our full year estimate. The negative variance was due to the much lower revenue contribution from the equipment manufacturing and the precision engineering segments amidst the slower HDD industry.

Dividends  No dividend was declared for the quarter under review.

Key Result Highlights  YoY. Despite the new sales recognition contributed by the aerospace segment following the acquisition of Avitron Private Limited, the 1Q13 revenue still dropped by 20% with pallid sales at the equipment manufacturing (-75%) and precision engineering segments (-60%). This was due to the prolonged lacklustre demand for HDD test equipment and large-to-small format machining. Meanwhile, EBIT dropped by 68% as costs and expenses were not effectively absorbed on the back of low volumes and under-utilised capacity.

 QoQ, 1Q13 revenue dropped by 14% dragged down by aerospace and precision engineering segments. Lower revenue growth QoQ in the aerospace segment was merely a reflection of sales normalisation as sales in the last quarter was better than the norm on the back of higher fulfilment of its backlogged orders. With lower top line growth coupled with the LBIT in the equipment manufacturing segment, EBIT dropped by 43%.

Outlook  With lacklustre PC demand that will lead to the deferment of capex budget on the overall HDD industry, we are of the view that the group’s equipment manufacturing and precision engineering segments should remain subpar in the near-term. Nonetheless, we believe the impact should partly be mitigated by its resilient aerospace segment.

Change to Forecasts  We have lowered our FY14-FY15 earnings estimates by 14%-21% to account for lower sales of HDD test equipment and lower revenue from precision machining.

Rating Downgrade to MARKET PERFORM

Valuation  Our TP has been lowered to RM2.51 (from RM2.83) after we revised the earnings forecasts downwards. This is based on a targeted FY14 PER of 15.2x (representing a +1.0SD level above the 1-year forward PER mean for its strong parentage in Temasek and sustainable growth from the aerospace segment).

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

Source: Kenanga