Flying higher: Since 2013, SAM Engineering had transited from being a semiconductor-dominant business to one that now derives close to 70 of its revenues from the aerospace industry. It produces components for plane manufacturers such as Boeing and Airbus.
Dividend play prompts investors to look at Sam Engineering & Equipment
THE growth in dividends being paid out by Sam Engineering & Equipment (M) Bhd (SAM Engineering), one of the few component manufacturers for the airline industry, has attracted increasing interest by investors locally and abroad.
According to data obtained from the Bloomberg terminal, SAM Engineering, which is controlled by Singapore Aerospace Engineering (SAM), had seen its dividends returned back to shareholders increasing at an exponential rate of 108% in the past one year.
Its recent dividend announcement took the market by surprise as the company has a portion of its business in the semi-conductor industry - manufacturing equipment for producers - a segment that is going through a tough operating environment.
However, this obviously has changed as the airline component of its business takes up the mantle to drive the earnings of the company.
Since 2013 SAM Engineering had transited from being a semiconductor dominant business to one that now derives close to 70% of its revenues from the aerospace industry.
It produces components for plane manufacturers such as Boeing and Airbus.
There are not many such producers in this region as it takes years of expeience and perfection before the parts can be acceptable to the plane manufacturers.
SAM Engineering’s move towards becoming a supplier of components for planes is outlined by its chairman Loh Chuk Yam.
“Despite the continued weakness in our equipment business, revenue for the group rose steadily due to the strong aerospace sales.
“The demand for aero-engine cases exceeded the negative impact caused by the weak test equipment business,” the company’s chairman Loh said in the annual report.
Thanks to its diversification into manufacturing parts for plane, SAM Engineering has been able to derive steady income and build up a strong balance sheet.
It has cash balances of RM103.6mil and no borrowings.
Its trade receivables after netting off payables about RM56mil. It also has inventory numbers of another RM140mil.
Two weeks ago, it announced special dividend and interim dividend amounting 32.2 sen, which is higher than the 17.25 sen declared last year.
Notably, SAM Engineering had seen dividends growing consistently in the past four years.
Its shares had registered growing dividend yields, as it rose from a net yield of 1.7% in 2012 to 7.67% this year. (see table attached)
With such generous payouts generated from its business, SAM Engineering had recorded a net dividend payout ratio of 40% in the financial year 2015 (FY15) ended March 31.
The latest dividend announcement in the past week will only be computed for FY16’s payout ratio.The payout ratio in FY15 almost doubles the previous year’s payout ratio of 21%.
Whether this short term buying interest or high dividend payouts can be sustained moving forward will be key but analysts note that the aerospace industry is a highly niched one.
It also has strong shareholders in SAM and other Temasek Holdings (Pte) Ltd related companies holding a total of 74.18% in the Penang based company.
“The reason being for some hesitation in its share price could be the illiquid nature of the stock, but it does seem like it is a fundamentally sound company with strong shareholders,” an analyst says.
SAM came into the company in 2010 when it was then known as LKT Industrial Bhd. SAM injected the aerospace business to complement LKT’s operations of manufacturing equipment for the electronic industry.
In return for SAM injecting the aerospace business, the company issued the Irredeemable Convertible Unsecured Loan Stocks (ICULS).
The key question today is whether such dividend payouts can sustain, and on the face of it notwithstanding any changes in future capital requirements, the company will be able to keep such payouts.
The total dividends paid in FY15 totalled RM14.54mil and for FY16, it will be paying at least RM27.14mil at the current weighted average number of shares in circulation.
Its free cash flow per share is equivalent to 92 sen.
Enticing ICULS holders?
The corporate exercise of distributing more dividends have also enticed the holders of Sam’s ICULS to convert their holdings of these loan stocks to shares.
According to filings with the stock exchange, close to 40% of the ICULS holders have now converted their loan stock holdings to ordinary shares on the basis of one RM1.00 nominal value of ICULS for approximately 0.476 ordinary shares each.
Following this, the latest issued and paid up share capital of Sam’s ICULS now stands at 50.88 million loan stocks away from the 101.25million ICULS issued when it was originally announced.
The increased conversion by holders of the company’s loan stocks indicates that increasing numbers of its loan stocks holders have become receptive and are indeed aware of the rising dividends of the mother company.
This after all is a win-win proposition for both the company and holders of Sam’s ICULS, if the scenario of increasing dividend payouts does sustain into the future.
This is premised upon the company being able to save on the indicative coupon rate of 4% and reduce on short and long term liabilities exposure while the additional shareholders will be able to gain a direct exposure to the company’s growth and whatever direct returns that these may entail in the future.
The ICULS corporate exercise was initiated then in Sept 2012 to fulfill the purchase consideration for the acquisition of a 100% stake in Avitron Private Limited from Singapore Aerospace Manufacturing Pte. Ltd.
According to its financial statements for the FY15; Sam Engineering had seen its total finance costs due to the ICULS also being reduced by 67.3% to RM666,000 from RM1.11mil in FY14.
Staronline | 04 Jul 2015
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SAM plans to grow via additional investments and acquisitions
GEORGE TOWN: SAM Engineering & Equipment (M) Bhd, which specialises in producing component parts for airline companies such as Airbus and Boeing, is looking at organic expansion as well as through acquisitions.
The group with backlog orders of RM2bil that will keep it busy until 2020 has set aside RM200mil to invest in its operations in Malaysia over the next two years.
Group managing director Jeffery Goh Wee Keng told StarBiz the expansion would be in line with its plan to position the group as a global player in the aerospace industry.
“We plan to be a global player with a presence in the US and Europe in five years, with an annual turnover of more than RM1bil.
“We are already on track to achieve our RM1bil turnover target in two to three years, which will position our group as a leading player in Asia-Pacific,” he said.
To further beef up the group’s goal to be a global player in the aerospace industry, Goh said SAM would pursue acquisition plans.
“We are looking to take over aerospace manufacturing companies making wing and structural components for aircraft.
“We currently specialise in manufacturing aerospace engine casing,” he said.
On SAM’s plan for another plant, Goh said the plant could be located anywhere in the country.
“It doesn’t necessarily have to be in Penang, where the current plant is located (in Bayan Lepas),” he added.
The planned RM200mil investment would help SAM cope with its current order book of RM2bil and also to cement the company’s position as a leading component supplier of aircraft parts beyond 2020.
“This will take our business beyond 2020. The RM200mil will add more manufacturing space for the group to cater to new aerospace component orders,” he said.
Goh said that in two years, the group’s aerospace business would generate more than 70% of its revenue, compared to 63% now.
“Our aim is to grow the aerospace contribution to 80% of the group’s revenue,” he said.
SAM’s other business is in the manufacture of testers for the hard disk drive (HDD) industry and front-end semiconductor manufacturing equipment.
In the group’s 2014 annual report, chairman Loh Chuk Yam said 2013 marked SAM’s semiconductor and electronic dominant business as a stable business model with 63% of its revenue from the less volatile aerospace industry.
To revitalise the engineering know-how of the semiconductor and electronic segment, SAM is now working with its sister company in Germany, esmo AG, to bring the best of German engineering and technologies into the business, according to Loh.
“It has started to bear fruit with orders flowing in,” Loh said.
SAM recently reported a net profit of RM1.57mil in the first quarter to June 30 on the back of RM93.16mil turnover. This was down from RM2.44mil on revenue of RM94.74mil a year ago.
It attributed the lower profit mainly to the unfavourable foreign exchange movement resulting from the weakening of the US dollar. Revenue from the equipment manufacturing and precision engineering segments fell due to the weak HDD industry, which was partially offset by higher revenue from the aerospace segment.
For the financial year ending March 31, 2015, the company expects revenue from the aerospace industry, which accounts for 70% of group revenue, to remain stable. “However, the semiconductor and HDD industries are experiencing a slowdown, and capital expenditure budgets by both the semiconductor and HDD manufacturers are deferred until demand picks up again. Thus our equipment manufacturing and precision engineering business for the remaining quarters will be challenging,” it told Bursa Malaysia.
SAM is a subsidiary of Singapore Aerospace Manufacturing, which also owns Aviatron (M) Sdn Bhd in Penang Science Park, Bukit Minyak.
According to Deloitte in its 2014 Global Aerospace and Defense Industry Outlook report, revenue of the aerospace industry is expected to grow in the 5% range for 2014.
Staronline | 08 Sep 2014
spaghetti
Good start and bright future.
2015-07-12 18:19