Broadway Industrial: Outlook dampened by Thai floods (OSKDMG)

(SELL, S$0.33, TP S$0.30)

Forex losses larger than estimated; reiterate SELL. Broadway reported losses of S$9.9m in 3Q11, mainly attributable to flat revenue growth and a huge net forex loss of S$13.2m. Taking out the impact of forex impacts, PATMI of S$13.7m for 9M11 accounted for only 61.2% of our initial estimates. Due to the massive Thai floods and supply chain disruption, we expect 4Q11 results to be worse than 3Q11. FY12 is likely to be a backend loaded year as its Hard Disk Drive (HDD) business will only resume normal production towards second half of next year. As such, we lower our core earnings estimates by 26.0% in FY11 and 13.4% in FY12 to S$16.6m and S$23.8m respectively. Maintain SELL, with a new TP of S$0.30 pegged to 5.3x FY12 earnings (5-yr historical average).

Hedging too much. Though hedging for forex risks is necessary, we opine that Broadway is currently holding too much forward contracts that are long-maturity (average of 2 years) and out-of-money (average strike price of S$1.23) , exposing the group to even more risks given the macro uncertainties. Nevertheless, if the exchange rate of USDSGD were to stay put at 1.27 by end of this quarter, we expect the group to revert back S$4.5m of its losses provided in 3Q.

Wuxi plant to take over Thailand production. Following the massive Thai floods (its plant is submerged in 2m high water), Broadway is now looking to ramp up its Wuxi plant (currently 50% utilised) production in order to fulfill Seagate and Hitachi’s orders in time. We expect the Broadway to sustain its production capacity amid higher costs as new workers are being hired in Wuxi while salary expenses continue to incur in Thailand (US$400,000/mth) despite no production.

… but will still be hit by the supply chain disruption. While Seagate’s facilities are not affected by the floods, there will be supply chain disruption as a result of shortage of key components such as sliders and motors. This will eventually slow down Seagate’s production and in turn negatively impact on Broadway. As such, we believe that the group’s HDD business will only be able to resume normal production towards second half of FY12 as the whole industry recover from the flooding woes.