Amtek Engineering Ltd (CIMB)

OUTPERFORM Maintained
S$0.96 @07/06/11
Target: S$1.43
Technology Components

No road blocks to growth


• Recent weakness throws up buying opportunity. Our conversations with management suggest that business had remained healthy in the June quarter and Amtek is on track to meet our full-year profit forecast, representing a solid 129% yoy jump. We remain positive on its earnings prospects, underpinned by new programme wins in the automotive and electronics & electrical segments. We maintain our earnings estimates and target price of S$1.43, pegging the stock at only 9x CY12 P/E, which we deem undemanding against its healthy earnings prospects and divided yields. We see catalysts from strong 4QFY11 results, further penetration of high-margin businesses, and a possible recovery of its storage business in 2H11.
• Growth from automotive and electronics & electrical segments. The group continues to gain traction in these two segments on the back of greater outsourcing and the relocation of manufacturing facilities to Asia by OEMs.
• Data storage still weak, but may start seasonal uptick in 2H11. This is in line with the muted guidance from major drive makers for the June quarter. However, business from this segment may improve as we enter the seasonally stronger half.

No slowdown in business
Business remained healthy in the June quarter. From our discussions with the company, Amtek appears on track for sequential growth in 4QFY11, with growth coming from most sectors except data storage and enterprise server enclosures. We understand that orders have not been pushed back or cut despite earlier fears of disruptions in the global supply chain following the Japanese earthquake and tsunami. The higher sales should result in margin expansion from operating leverage. We are projecting a 42% qoq and 371% yoy jump in 4QFY11 profit (due to the absence of oneoffs) to US$14.1m.

Growth from automotive and electronics & electrical segments. The group continues to gain traction in automotive parts on the back of greater outsourcing and the relocation of manufacturing facilities to Asia by OEMs. Management remains bullish on this segment, supported by its new customer and programme wins and increased volumes from existing products as customers increasingly source parts more locally, especially in China. Despite recent disruptions to the supply chain as reported for some automotive makers, Amtek’s automotive components business continues to grow yoy. Additionally, we believe its focus on safety-related automotive components will help create greater stickiness among customers as production qualification here takes a long time. Like Amtek, we have assumed healthy double-digit yoy growth p.a. over the next few years, lifting contributions from this segment to about 20% of group sales by FY14, from 12% in FY10.

In the electronics & electrical sector, Amtek’s growth has been largely powered by the relocation efforts of one of its major customers from Europe to Asia. This had helped to lift contributions from this segment to 13.6% of group revenue in 3QFY11 from less than 10% in FY10. We expect the momentum to persist as we understand that this major customer wants to work more closely with Amtek in Asia.

Other potential sectors Amtek is hoping to harness are medical and life sciences. The group is already in discussions with a few candidates, but has admitted that gestation will take much longer in these fields, with any meaningful contributions unlikely in the near term. However, we believe the group is moving in the right direction to expand sales in the automotive, industrial, medical and life science sectors, where margins are definitely better and orders, less volatile.

Data storage remains weak, but may start seasonal uptick in 2H11. This is in line with the muted guidance from major drive makers for the June quarter as 2Q is traditionally the weakest for the HDD industry. However, business could improve hoh as we enter the seasonally stronger half. Based on consensus forecasts, sales for both Seagate and WD are expected to expand 9% and 12% hoh respectively. These figures do not include any contributions from Samsung to Seagate and HGST to WD, as their proposed acquisitions are still subject to approvals from government bodies.

Recent price weakness could have stemmed from fears of share overhang as the moratorium for its major shareholders (private equity) on stake unloading had expired on 1 Jun. Although we do not rule out any share sales, we believe Amtek is attractively priced now, at only 6.3x CY12 P/E with a 6.6% projected yield.

Risks
Potential disruptions for the automotive sector that may eventually filter down to the supply chain and affect the sales of its customers. This in turn may affect its automotive components business. So far, orders have not been pushed back for the group.

Rising material and labour costs, which may pinch margins if Amtek fails to pass on the higher costs to customers. So far, it has been able to pass on costs, and is actively working on improving its automation for some processes to tackle rising labour costs in China.

Valuation and recommendation
No change to our forecasts; maintain OUTPERFORM. We leave our FY11-13 profit forecasts, OUTPERFORM rating and target price of S$1.43 intact, pegging Amtek at 9x CY12 P/E, 1 standard deviation above its valuations before its privatisation in 2007. We see this as reasonable in view of its healthy earnings outlook and decent dividend yields. We see catalysts from strong 4QFY11 results, further penetration of high-margin businesses, and a possible recovery of its storage business in 2H11.