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Background: Broadway Industrial has two core businesses. It manufactures precision machined parts for the hard disk drive, semiconductor and automotive industries, as well as provides foam plastic solutions for protective packaging, insulation, automotive and medical applications. HDD accounts for about 70% of revenue, non-HDD about 10%, and the rest from foam plastic.
Latest 2Q11 results: Net profit fell 64% YoY despite 1.5% higher sales as the HDD and semiconductor businesses were hit by the weak US$ and price erosion of its core actuator arm product. However, foam plastic was a bright spot despite higher labour costs as well as start-up costs from new subsidiaries in China.
Key ratios…
Price-to-earnings: 3.1x
Price-to-NTA: 0.9x
FY10 dividend per share / yield: $0.02 / 5.9%
Return on equity: 6.5% (2Q11 annualised)
Net gearing: 21.9% (end-2Q11)
Share price S$0.34
Issued shares (m) 416.0
Market cap (S$m) 141.4
Free float (%) 54.4%
Recent fundraising Nil
Financial YE 31 December
Major shareholders Wong Sheung Sze (36.1%), Lew Syn Pau (9.5%)
YTD change -37%
52-wk price range S$0.33-0.63
Our view
A tough year ahead. Earnings this year will be hurt by a combination of factors, key among which is Broadway’s ongoing relocation of certain HDD manufacturing activities from Shenzhen to Chongqing in a bid to escape high labour costs in Shenzhen. Although the company expects to realise cost savings by FY12, the massive movement of machinery and workers, as well as the operating of parallel operations in two locations during the move, is expected to impact FY11 profitability.
Likely to cut capital spending to preserve dividends. With the cost of the relocation and significant additional investments in hard disk drive operations, Broadway had originally expected capex to spike to $70m in FY11. However, with net gearing already doubled YoY to 0.2x as at 2Q11 and still-slow business flows expected in 2H11, management may reduce this capex to maintain the ordinary DPS of 2 cents declared in FY10.
Impact from Western Digital’s takeover of Hitachi GST still not clear. Broadway is the only supplier of actuator arms for Hitachi’s enterprise hard disk drives, a segment that accounted for 10-11% of its revenue in FY10. With the acquisition of Hitachi GST by Western Digital expected to close by year-end, volumes by HGST to Broadway may weaken in 2H11 even if it succeeds in its negotiations to become a supplier to Western Digital.
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