Amtek Engineering - Bumper dividend offsets weak results (DBSVickers)

HOLD S$0.66 STI : 2,765.74

Price Target : 12-Month S$ 0.69 (Prev S$ 1.20)

Reason for Report : Earnings/TP revisions post full year results

Potential Catalyst: Stronger than expected margin expansion or divestment proceeds

DBSV vs Consensus: Significantly below consensus

• 4Q11 met our estimates but was 30% below consensus; higher cost continues to pressure margin

• DPS of 5.5 Scts (55% payout) translates into attractive dividend yield of 8.4%; management believes 50% payout is sustainable

• FY12F earnings cut by 24% to factor in lower sales and margin, given macro uncertainty

• Maintain Hold with TP lowered to S$0.69 based on 7x FY12 PE (down from 9x target PE)

Sales growth exceeds but margin under pressure. 4Q11 core profit of US$9.6m (+221% y-o-y) was in line with our forecast but 30% below street. Higher labour costs continued to pressure EBITDA margins, which slipped to 11.4% from 13.1% in 4Q10 and 12% in 3Q11. Sales grew 7% y-o-y to US$175.8m, a tad stronger than expected as growth in other segments offset weakness in mass storage (-20%y-o-y).

Still starting new programs /customers but outlook is cautious. Notwithstanding the uncertainties, Amtek continues to launch new models with new and existing customers in Auto, Casings & Enclosures and Consumer Electronics. However, we see some risks as key Auto customers are mostly European (Autoliv, Thyssen Krupp). Moreover, high labour costs will continue to cap margin expansion, which has been lagging expectations for the past few quarters now. As such, we cut FY12/13F by 19-24% to factor in our more conservative growth targets.

Maintain Hold, TP cut to S$0.69. In spite of the weak results/outlook and significant earnings downgrade, we expect the share price to be supported by the generous dividend of 5.5 Scts translating into dividend yield of 8.4%. Management is comfortable in maintaining a dividend payout ratio of 55%.