Somboon Advance Technology

Somboon Advance Technology Plc (SAT)
Valuation lower than when it was flooded in 2011! The less exuberant industry
outlook and anticipation of weaker earnings in 2H13 have led to a share price
underperformance of 34% YTD – which, in our view, is far overdone. SAT is now trading
at 8.0x 2013PE or 6.4x 2014PE – far below its 10.5x historical average and the 9.0x it
traded at when it was flooded in 2011. At that time, the automotive industry sank 11%
and SAT’s earnings plummeted 47%. The better outlook for the automotive industry,
particularly the domestic market, plus improvement in SAT’s earnings in 4Q13 should
act as price catalysts. We rate SAT as a BUY with mid-2014 TP at Bt22/share.
Highlights from Opportunity Day presentation:
- SAT estimates 2013 auto production at 2.50-2.55mn units and expects lower auto
production in 2H13 than 1H13 (1.3mn units in 1H13 vs. 1.2mn units in 2H13) upon
slower domestic auto sales.
- SAT guides to a continued weakening in the domestic auto market in August, but
believes domestic auto sales will improve slightly or at least show signs of
stabilisation in September-October, supported by car dealer promotions.
- Sales to Kubota, 11% of SAT’s sales, will continue to grow with higher tractor
production in 2H13 of 34K units vs. 30K units in 1H13 or 12% HoH.
- SAT targets 2013 sales growth of 2% and gross margin of 16-17%. It guides to
relatively flat sales in 3Q13 from 2Q13. Sales will be better in 4Q13, boosted by the
annual motor show and higher auto exports.
- SAT has terminated an overseas JV to produce axle shafts in Indonesia after it
lost the orders from clients. The unfavorable investment climate has led it to put
any projects overseas on hold.
- SAT sees big trucks as a potential market. Currently, it produces axle shafts for
Hino and plans to produce more parts, such as coil springs, and find more clients
for these.
3Q13F to mark the bottom. The company’s 2013 target is in line with our projection.
We are relieved that it is putting overseas projects on hold, since we were uncertain of
the success of these given SAT’s lack of experience overseas. We believe 3Q13 core
earnings will be this year’s bottom at Bt157mn, down 37% YoY and 18% QoQ, with
earnings then improving in 4Q13F, supported by improving auto production