Broadway Industrial - No major surprises (CIMB)

NEUTRAL Maintained

S$0.42 Target: S$0.47

Mkt.Cap: S$175m/US$145m

• Slightly below; still a NEUTRAL for its low P/BV and decent yield. Excluding S$1.4m forex and impairment losses, Broadway’s 2Q core earnings were 3% below our estimate and 19% below consensus because higher-than-expected sales were offset by higher opex and effective tax rate. 1H net profit accounted for 42% of our full-year forecast and 35% of consensus. We adjust FY11-13 EPS by -4% to +1% for this set of results, higher sales and lower GP margin. But we retain our target of S$0.47, still based on its 5-year historical P/BV average of 0.8x. We maintain our NEUTRAL call given the support from its decent dividend yields and low valuations.

• Sales inched up 2% yoy to S$143.8m in 2Q11, lifted largely by the foam packaging business, which saw a 32% yoy sales jump to S$39.3m on the back of its timely expansion. Sales of HDD components were down 8% yoy to S$91.0m, while sales of non-HDD components rose 2% yoy to S$13.5m. Sales in all product segments would have recorded yoy growth if not for the weaker US$ against the S$.

• EBITDA margin shrank 5.1% pts yoy to 8.9% in 2Q11, dragged down by an increase in operating costs and lower GP margin. Broadway also incurred additional S$150k-200k wages for operators hired in preparation for its new plant in Chongqing. The effective tax rate jumped to 18%, which we believe was a result of higher contributions from the foam packaging business.

• Net gearing rose to 0.22x from 0.09x a quarter ago due to the longer cash cycle (higher contributions from foam packaging business) and capex for expansion. It declared an interim dividend of 1cts (same as 1H10 after adjusting for the 1-for-1 bonus issue), translating into a decent annualised yield of 4.8%.

• Expect seasonal uptick in 2H11. Volume for the HDD components business is expected to see healthy hoh growth in 2H based on major customers’ build plan, especially for HGST as component shortages will be resolved in 3Q. Relocation of the labour-intensive backend assembly process to Chongqing is on track for completion by end-11 and Broadway expects to enjoy the cost savings from 4Q11 onwards. The foam packaging business is expected grow hoh on the back of seasonal demand and added facilities. The only weak spot is the non-HDD component business due to the slowdown of semiconductor-related business.