Somboon Advance Technology

Somboon Advance Technology Plc (SAT)

 

Investment thesis

We judge that the automotive industry should recover in 2H16—the worst of the post-first-time car-buyer scheme collapse in sales during FY15 is now behind us. SAT is expected to deliver better YoY, led by capacity utilization increased to 65% in FY16 (from 62% in FY15). Furthermore, the firm will be granted new orders from Hino to produce axle shafts for big trucks and from Kubota for 2016 model tractors. We maintain our FY16 sales growth of 5% YoY to Bt8.8bn following the 6% YoY rise last year. Our model indicates full-year earnings of Bt777m, up 22% YoY. The stock currently trades at an FY16 PER of 8.7x, somewhat below its long-term mean of 10x. Our BUY rating stands.

Gradual recovery in FY16, with at least 3% rise in sales

SAT management sets its FY16 sales growth guidance at 3-5%, driven by new axle-shaft orders from Hino (for big trucks) and Kubota tractors. Again, SAT anticipates FY16 nationwide auto production of 1.9m units (flat YoY). Note that SAT has diversified production into parts for big Hino trucks for export and agricultural vehicles for Kubota (tractors—from 67k units in 2015 to 70k units in 2016). We forecast an FY16 sales growth of 5% YoY, in line with management’s guidance. The firm sets FY16 CAPEX of Bt390m, unchanged from 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 Toyota, Kubota and Mitsubishi from which revenue was slated to start flowing in 2H15 and then into FY16. Thus, its capacity utilization will rise in the full year in tandem with sales expansion of 3-5%. SAT expects its FY16 run rate to be in the range of 60-70% (65% for mid-rate) on rising orders, as noted above. Note that its FY15 capacity utilization rate was high at 62%.

Net profit margin is targeted at 8-9% in FY16

Given bigger sales target and efficiency improvements in FY16, the firm guides for FY16 gross margin of 15-16% (against 14-15% in FY15). We conservatively assume GM of 16.5% and NM of 8.8% in FY16, following 15.0% and 7.6%, respectively, last year. We have seen scope for upside if the SAT delivers decent full-year net profit margin over targeted.

Earnings for 4Q15 to post YoY drop

We estimate SAT’s 4Q15 profit at Bt199m, down 6% YoY (but up 10% QoQ), due to lower YoY sales. Our 4Q15 model assumes that sales dipped 14% QoQ and 7% YoY to Bt1.9bn. We forecast its 4Q15 GM of 16.8%, down from 19.1% in the same period last year due to lower sales volume from price competition and rising OPEX for new investment.