Amtek Engineering - Tooling still buzzing (CIMB)

OUTPERFORM Maintained

S$0.66 Target: S$1.14

Mkt.Cap: S$359m/US$296m

Technology Components

• Below; lowering forecasts but still an OUTPERFORM. 4QFY11 core net profit of US$11.4m (+15% yoy) is 7% and 20% below consensus and our forecasts respectively. The variances were lower-than-expected GP margins and higher-thanexpected opex. FY11 core net profit of US$46.7m (+35% yoy) is in line with consensus but 6% below our estimate. We cut our FY12-13 profit forecasts by 12-18% after factoring in lower GP margins and lower minority interest (as it plans to buy over the remaining stake in its plastic-injection subsidiary). We also introduce FY14 forecasts. Our target price falls from S$1.43 to S$1.14 after our earnings downgrade, still based on 9x CY12 P/E. Nevertheless, Amtek remains an OUTPERFORM, with re-rating catalysts expected from its steady earnings growth prospects and sustainable good dividends.

• Sales improved 7% yoy and qoq to US$176m in 4QFY11, driven by strong growth in automotive, electronics & electrical, consumer electronics and other segments, which more than offset weakness in the mass storage and printing and imaging (P&I) industries. P&I sales slipped yoy for the first time in 4Q11 as orders from its Japanese customers were affected by the Japan earthquake. Orders, however, have normalised in 1QFY12.

• EBITDA margins slipped 120bp yoy to 11.8% as a result of higher opex (10%-pt increase just on US$ depreciation) and lower depreciation charges. The absence of major restructuring costs in 4QFY11 (US$6.8m in 4Q10) lifted the bottom line by 16x yoy.

• Strong cash flows; final dividend of 5.5cts. Amtek generated about US$14m of positive FCF during the quarter, enabling the group to reduce its net gearing to 0.13x from 0.25x a quarter ago. It declared a final dividend of 5.5cts, representing about a 55% payout ratio and translating into an attractive yield of 8.3%.

• Good start to FY12. Steady growth has been noted in the first two months of FY12, led by increased orders from existing customers and the commencement of some new projects. We understand that its tooling division, which typically acts as a leading indicator, is still very busy with order intake healthy. However, management still sounded cautious because of an uncertain economic outlook in Europe and the US, prompting us to lower our growth assumptions conservatively.

Takeaways during analysts’ briefing

Expect to turn net-cash by end-FY12. Management expects the company to turn net-cash even with the dividends declared, unless there is a major slowdown in business. This is in line with our projection.

Capex to remain at US$20m-25m. This should be annual maintenance and upgrading capex unless there is major expansion. Amtek will only start adding capacity when utilisation rates top 75%. Average utilisation in 4Q11 was 60-70% and this is expected to improve in 1Q12.

Policy of up to 50% payout. However, management will also review its capex needs and cash inflows, and payouts may exceed 50%.

Growth drivers for FY12. Amtek expects growth to stem from similar sectors that had supported its strong growth in FY11. There has been a slight improvement in the mass storage segment after several quarters of yoy declines. This is positive as mass storage components offer above average group margins. It is also working on new customers in the medical and life science sectors.

Acquiring remaining stake in plastic-injection subsidiary, Lian Jun. Amtek will be acquiring the remaining 45% stake in Lian Jun for US$7.5m, valuing the latter at about 6.6x historical P/E. This would enable Amtek to better control and integrate plastic components with its core stamping business.