Amtek Engineering - Buy ahead of results (CIMB)

OUTPERFORM Maintained

S$0.59 Target: S$1.43

Mkt.Cap: S$318m/US$263m

Technology Components

Expect decent 4QFY11

A healthy 4Q and declaration of good dividends? We see the recent sell-down of Amtek along with the broader market as a buying opportunity. Amtek now trades at less than 4x CY12 P/E and offers 10.7% projected yields. Its major shareholder, Standard Chartered, had accumulated its shares at above 90cts in June, raising its stake to 29.9%. We believe our FY11 profit forecast of S$49.7m is achievable. This translates to 80% yoy growth in core earnings despite headwinds from US$ weakness and rising costs. Although we may trim some of our expectations for FY12-14 after the results to factor in slowing economies in the US and Europe, we are likely to retain our OUTPERFORM rating in view of its strong cash flows, attractive yields and undemanding valuations against its peers. Our unchanged target price of S$1.43 remains based on 9x CY12 P/E, 1 standard deviation above its 6-year mean P/E. We see catalyst from its healthy earnings growth and good dividend.

4QFY11 results expectations

Projecting 7% yoy and qoq revenue growth to US$176m for 4QFY11. We have assumed volume growth for most product segments with the exception of mass storage. Automotive components and electronics & electrical should continue to power growth, led by greater outsourcing by key customers and new project wins from existing and new customers. Sales of mass storage could surprise on the upside given that its major end-customer, Seagate, earlier reported better-than-expected unit shipments (up 12% yoy and 7% qoq).

EBITDA margins to improve 110bp yoy to 14.1%, lifted by higher sales and volume, a better sales mix, and the absence of loss-making operations and facilities. Net profit is expected to jump more than 5x yoy to US$14.1m as 4QFY10 was hit by restructuring costs of US$7.1m for the closure of its facility in Hungary and the proposed closure of its Jakarta plant. Excluding the one-off items, core earnings are still expected to jump a respectable 49% yoy.

Balance sheet should continue to improve; we predict a 4.6 USct final dividend. We expect Amtek to generate another quarter of positive FCF through its tight working-capital management and low capex. We have assumed a 50% payout, translating into a 4.6 USct final dividend. If so, this would imply a yield of 9.4%.

Outlook: we are still projecting steady growth. Our previous discussions with management suggest that business has stayed healthy despite weakness in the US and Europe. Some key customers are still shifting their production requirements to Asia. We will be reviewing our FY12-13 forecasts after the results to model in more conservative growth rates in view of a potential slowdown in demand. Even with a slower growth rate, we believe Amtek can still generate good cash flows, enough to sustain its good dividend payments.

Key risks include a major slowdown in the overall market as a result of a weak recovery in the US and the debt crisis in Europe.