Period 3Q14/9M14
Actual vs.Expectations Above expectations. The group reported 3Q14 net profit (NP) of RM5.9m, bringing its 9M14 NP to RM18.6m which at 83% of our full-year estimate topped our expectation.
The key positive deviation was mainly the betterthan-expected EBIT margin on the back of better operational efficiency as well as lower-than expected raw material costs.
Dividends As expected, no dividend was declared for the quarter under review.
Key Result Highlights YoY, despite the lower sales in Equipment Manufacturing (-37%) and Precision Engineering (-29%) segments amidst the dwindling HDD demand and lower sales in industrial format machining, 9M13 revenue increased by 20%, underpinned by the new sales recognition in the Aerospace segment following the acquisition of Avitron Private Limited. EBIT grew by 37% with the positive spillover effect from the higher Aerospace revenue, which also gives higher EBIT margin.
QoQ, 3Q13 revenue increased by 9% as the lower revenue in Precision Engineering segment (-15%) was offset by the higher sales in Equipment Manufacturing segment (+32%) on the back of the recovering semiconductor sector. However, EBIT was lower by 39% as the increased profitability in Aerospace segment was mainly offset by unfavourable forex movement resulting from the weakening of USD as well as unfavourable sales mix in the non-aerospace segment.
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 would remain subpar in the near-term. Nonetheless, we believe the impact would partly be mitigated by its resilient aerospace segment.
Change to Forecasts Our earnings estimates for FY14 and FY15 have been increased by 12.1% and 17.3%, respectively, to mainly account for: (i) lower raw material prices, (ii) USD/MYR new assumption of RM3.25 (from RM3.17), and (iii) favourable product mix.
Rating Maintain MARKET PERFORM
Valuation Post earnings revision, our target price has been raised to RM2.98 (from RM2.51) and we have also rolled over our PER valuation to FY15. This is based on a 14.0x (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 of its business segments.
Source: Kenanga
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