Somboon Advance Technology

Somboon Advance Technology Plc (SAT) 

Investment thesis

Since our rating downgrade to HOLD on March 7, SAT’s stock price has dropped about 20% to Bt28.25. As such, there is now 15% upside to our downsized target price of Bt32.50 (down 21%, pegged to a justified PER of 13x). Currently, SAT trades at inexpensive PER of 11.4x, comparable with STANLY’s 11.5x (BUY) and AH’s 10.2x (BUY). That makes the firm worthy of a TRADING BUY rating. Note that we have cut our earnings projections by 16% to Bt1.06bn for FY13 and by 11% to Bt1.26bn for FY14 to factor in higher OPEX assumptions (mostly staff costs). Despite our projection cuts, we expect SAT to deliver earnings growth of 30% for FY13 and 19% for FY14, driven by capacity expansion mostly in 2H13.
Moderate Q1 2013 sales growth of 15% YoY
Management guides that 1Q13 sales rose 15-16% YoY, somewhat slower than automobile production growth of 44% YoY (from 500K units in 1Q12 to 720K units in 1Q13), due mainly due to capacity limitations. SAT’s 1Q13 capacity utilization was 114% (excluding ICP2, the steel mill), up substantially from 105% in FY12. The ICP2 plant’s run rate increased to 85-86% in 1Q13 from 75-76% in FY12. We maintain our FY13 sales growth forecast of 17% unchanged for the moment.
FY13-14 earnings forecasts cut, due to heavy staff costs
The scarcity of appropriately skilled labor and the minimum wage hike have caused SAT to guide that its staff costs will rise significantly this year (especially special bonus expenses). In order to account for the heavier expense item, we have raised our OPEX assumptions by 30% for FY13 to Bt835m and by 18% for FY14 to Bt984m. As such our earnings forecasts fall by 16% to Bt1.06bn for this year and by 11% to Bt1.26bn for next.
Capacity expansion
SAT plans to increase the output capacity of its product champions by debottlenecking—up by 16% for axle shafts, by 125% for stabilizer bars and by 10% for coil springs (the three products together comprised 50% of 1Q13 sales). Greater output should mitigate the effect of higher staff costs. However, we have conservatively cut our net margin assumptions from 11.4% to 9.6% for FY13 and from 11.2% to 10% for FY14. If SAT’s output were to rise faster than we currently assume, there would be scope for upside to our model.
Expect Q1 2013 earnings growth of 13% YoY
We estimate 1Q13 earnings of Bt234m, up by 13% YoY and 23% QoQ. Our projection indicates that SAT’s 2Q13 profit will dip on low season for automobile production (numerous public holidays in April). Note that the firm guides for 2013 auto production growth of 10% YoY to 2.7m units (the Federation of Thai Industries forecasts output of 2.8m cars).