Somboon Advance Technology

Somboon Advance Technology

Investment thesis

The automotive industry will start recovering this year—the worst of the post-first time-car buyer scheme collapse in sales is now behind us. SAT will deliver better YoY numbers, we believe, led by a capacity utilization increase to 85% (we estimate 79% for FY14). Furthermore, the firm will receive new orders from Mitsubishi, Isuzu and Hino this year. We forecast FY15 sales growth of 9% YoY to Bt8.8bn after an estimated 10% YoY decline to Bt8.1bn in FY14. Our model indicates FY14 earnings of Bt650m, down 33% YoY, then a 34% bounce in FY15 to Bt870m. The stock currently trades at an FY15 PER of 8.5x, somewhat below its long-term mean of 9.8x. Our BUY rating stands.

Gradual recovery in FY15 with 10% rise in sales

Management maintains its FY15 sales growth guidance of 9-10%, driven by new axle shaft orders from Mitsubishi (Triton), Isuzu (D-Max), Hino (big trucks) and Kubota (tractors). SAT assumes 2015 nationwide auto production of 2.1m units, up 12% YoY. Note that the firm has diversified into making parts for big trucks for Hino (for export) and parts for tractors for Kubota (Kubota’s output will rise from 68k units in 2014 to 72k units in 2015). We forecast FY15 sales growth of 9% YoY, in line with management guidance. The firm budgets for FY15 CAPEX of Bt600m, up from about Bt323m last year.

Capacity utilization will rise gradually

SAT is building a new production line that will make parts for big trucks and new orders for Kubota and Mitsubishi, for which revenue is slated to start flowing in 2H15. Thus, its capacity utilization will rise in FY15 in tandem with sales expansion of 9-10%. Note that SAT’s run rate was 83% in 1Q14, 73% in 2Q14, 79% in 3Q14 and 79% in 4Q14 (79% for FY14 as a whole). Management expects the FY15 utilization rate to exceed 80%, buoyed by rising orders, noted above. 

GM and net margin will expand in FY15, led by greater scale

Higher sales and efficiency improvements will boost FY15 gross margin from 17-18% in FY14 to 18-19%, this year, according to management We conservatively assume GM of 17.7% and NM of 9.9% in FY15, following estimates of 17.2% and 8.1%, respectively, for FY14. 

4Q14 earnings to post QoQ recovery

SAT should post a 4Q14 profit of Bt211m, up 48% QoQ (but down 49% YoY), due to greater QoQ working hours. Our model assumes that sales rose by 4% QoQ and 4.1% YoY to Bt2.1bn for the quarter, in tandem with increased 4Q14 auto production of 470k units (up 3.1% QoQ). We estimate 4Q14 GM of 17.8%, up from 15.8% the previous quarter, due to greater sales volume and improved operating efficiency.