Somboon Advance Technology

Somboon Advance Technology Plc (SAT)

SAT’s share is trading at a 4-year low, tagging the downtrend of the Thai auto industry, which we view as nearly over. As the Thai economy gets back on its feet and farm income rises, we expect commercial and agricultural vehicles - 80% of SAT’s sales – to lead demand recovery. Rising sales and margin expansion will boost SAT’s earnings to grow 27% YoY in 2017, ending the downtrend seen since 2014. We see risk/reward as attractive, with a 35% upside gain to our mid-2017 TP at Bt18/share and high dividend yield at 4-5% p.a. in 2016-17. SAT is our top pick in the Thai auto sector. 

 

Thai auto demand is hitting a cyclical low. Thai auto production nosedived in 2014, dragged down by the downtrend in the domestic auto market after the first-car buyer stimulus program ended, with the plunge in the demand amplified by the sinking of Thailand’s economy. After a lengthy downtrend, we believe domestic auto demand is returning and this will put Thailand’s auto production back on uptrend path. May’s domestic auto sales turned to positive growth of 16% YoY, driven primarily by strong commercial vehicle sales, and this trend will be further supported, as some data is hinting at economic improvement: rising farm income, strong retail sales and upwardly revised GDP forecasts. In this environment, SAT is best placed, since commercial vehicles contribute a large ~60% of its total sales with tractors at ~20%, both of which do better as farm income rises. 

 

Better industry prospect to support earnings growth. We expect Thai auto production to grow 7% YoY to 2.1mn units in 2017. Better Thai auto industry prospects with rising auto production should help boost SAT’s sales by 10% YoY in 2017 and 9% in 2018 and gross margin will widen from 14.1% in 2016 to 15.5% in 2017 and 16.0% in 2018. Driven by both the top line and margin expansion, we expect SAT’s earnings to grow 27% YoY to Bt768mn in 2017 and 20% YoY to Bt919mn in 2018, turning back up from the downtrend seen since 2014.

 

Low-hanging fruit valuation. SAT’s share price has plummeted 59% from its peak in 2013 and it is trading at a 4-year low, dragged down by the downtrend of the Thai auto industry and its earnings – but we see these as nearly ended. With a firm earnings turnaround, SAT’s valuation in terms of PE will come down to 7.4x in 2017, 26% below its historical average of 10x. SAT’s dividend yield is attractive; in 2015, it paid a dividend of Bt0.60/share implying 3% dividend yield during a period of earnings weakness and we expect it to offer attractive dividend yield at 4-5% p.a. in 2016-17.

 

Top pick of the sector; Buy at mid-2017 TP of Bt18/share. Our view on the Thai automotive sector is positive and SAT is our top pick because of its high exposure to the commercial and farm vehicle markets, which will lead demand recovery. SAT’s current low valuation gives an attractive entry point since this implies the market has not priced in the upcoming positives. We place a BUY on SAT with mid-2017 TP at Bt18/share based on 10x PE, its historical average, to which the stock offers 35% upside.