Period  1Q15

Actual vs. Expectations Below expectations. The group reported 1Q15 net profit (NP) of RM1.6m (-84% QoQ; -27% YoY), which constituted only 5% of our full-year estimate. The key negative deviation was the much lower revenue contribution from the Equipment manufacturing on the back of lower sales of HDD test equipment

Dividends  As expected, no dividend was declared for the quarter under review.

Key Result Highlights YoY, 1Q14 revenue dropped by 2% as the higher sales in the Aerospace segment (+7%) was erased by the lower revenue in Equipment Manufacturing (-20%, with the dwindling demand for HDD test equipment amidst weak HDD industry) and Precision Engineering (-11%, lower sales in industrial format machining). Meanwhile, EBIT dropped by 24% which we believe was due to costs and expenses which were not effectively absorbed on the back of low volumes and underutilised capacity as well as unfavourable forex movement.

 QoQ, 1Q14 revenue declined by 26% due to the lower revenue in Aerospace segment (-20%) and Equipment Manufacturing segment (-46%). With lower revenue coupled with the LBIT in the equipment manufacturing segment, EBIT dropped 77%.

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

Change to Forecasts    No changes to our FY15E NP forecast.

Rating We have decided to switch this stock from our core coverage to retail coverage under the “On Our Radar” series, given the lack of institutional interest. Hence, it is now a NOT RATED stock (from MARKET PERFORM previously).

Valuation  We maintain our target price of RM3.41 based on a 14.5x FY15 PER (representing a +1.0SD level above the 1-year forward PER mean).

Risks  Fluctuation in foreign currencies and the cyclical nature of its business segments.

Source: Kenanga