Somboon Advance Technology

Somboon Advance Technology Plc (SAT)
 

Investment thesis: We maintain our BUY rating on SAT, premised on: 1) a V-shaped recovery in FY12 earnings, 2) further capacity expansion of about 30%, 3) the govt’s first-time car buyer tax rebate scheme and 4) an inexpensive valuation—an FY12 PER of 9.2x, much lower than its 2006 peak of 12.x. there is also scope for earnings upside from stronger sale growth, as Honda, Thailand’s second-biggest auto maker, resumed operating on March 27, much sooner than initially expected.
FY12 sales growth of 35%: Management guides that all the car makers with assembly plants in Thailand have accelerated production to make up for output lost last year. Thus, SAT expects a utilization rate of 75% this year (including a 30% capacity expansion in late FY11), up from the 65% (pre-expansion utilization) rate posted for FY11. The firm anticipate that FY12 sales will jump 35% YoY. Note that we stand with our sales growth forecast for this year of 27%.
GM is targeted at 19-20% range: Because SAT’s new capacity will take some time to reach a high utilization rate and achieve economies-of-scale, management guides for slight FY12 gross margin squeeze to 19-20% (its normal GM range is 20-21%, but the Japanese tsunami in March and the 4Q11 flooding made for an anemic GM of 15% last year). We model for GM of 19.5%. 
30% capacity expansion to augment FY12-14 growth: Management plans to expand production capacity for axle shafts (its main product), coil springs and stabilizer bars by 33%, 74% and 80%, respectively, in FY12 in order to cater to upcoming models (and catch up on lost 4Q11 output), such as new versions of the Mitsubishi Mirage and the Suzuki Swift. Furthermore, SAT intends to invest in India and Indonesia to produce component parts for pick-up trucks in those countries. The firm has set CAPEX budgets of Bt800m for FY12, Bt700m for FY13 and Bt200m for FY14.
Outlook
Clear visibility: The Federation of Thai Industries (FTI) forecasts that new car production in 2012 will recover to 2.1m units, up 45% YoY. All the big auto makers (Toyota, Nissan, AAT and Mitsubishi) have resumed operating and ramped up production to catch up with output lost as a result of the 4Q11 flooding. Honda, whose assembly plant was submerged, re-started making vehicles on March 27—much sooner than initially expected.
Automobile production totaled 142K units in April, up 59.6% YoY (but down 25.5% MoM, due to the large number of public holidays during the month), the fourth consecutive month of YoY increases. 4M12 car production rose 15% YoY to 642K units, which represents 31% of the FTI’s FY12 forecast of 2.1m units (up 45% YoY).