P.C.S. Machine Group Holding

P.C.S. Machine Group Holding Plc (PCSGH)  

PCSGH’s 2015 earnings more than halved from the exceptionally high 2012 by weaker sales and margin. A normalizing Thai auto industry with rising auto production plus the production start-up of its new orders will help lift PCSGH’s sales and margin from the expected bottom in 2016 to a strong rebound in 2017. PCSGH’s share price has plummeted 51% from peak and the over-penalized share price offers attractive investment return with 33% upside to our TP plus dividend yield at 5-6% p.a. in 2016-17. We rate PCSGH as a BUY with mid-2017 TP at Bt7 and place it as our top pick in the auto sector. 

 

All sales to the commercial vehicle market, which is leading recovery. The domestic auto market has been poor since 2013, but May’s auto sales turned to positive growth of 16% YoY, driven primarily by strong commercial vehicle sales. We believe this segment is in the forefront of recovery, as it is related to agricultural and business activities, for which some factors point to better days: rising farm income, strong retail sales and upwardly revised up GDP growth forecast. PCSGH is positioned to benefit directly from this, since its products are components for the powertrain system - the engine, transmission and final drive – of commercial vehicles.

 

Investment is paying off. According to company guidance, PCSGH has Bt2.2bn in new orders covering the next four-ten years. To serve future orders, PCSGH has invested in more production lines in advance of actual production. This means PCSGH has had to shoulder the cost before revenue flows in, pressuring margin. This was clearly evident in the weak gross margin of only 10.5% in 4Q15 and 15.3% in 1Q16 from 18% in 9M15. The production of these new orders was slated to begin in late 2Q16 and we expect this investment to pay off, raising sales and gross margin. 

 

Earnings to mark bottom in 2016. PCSGH’s 2012 earnings were exceptionally high at Bt1.7bn, then plummeted 70% to Bt532mn in 2015 as sales and gross margin were dragged down by negatives that included a fall in Thai auto production from a weaker domestic market and its cost burden from developing new production lines. We expect 2016 to be the end of its earnings downtrend, backed by a normalizing Thai auto industry with rising auto production plus the production start-up of its new orders. We expect earnings to grow 29% YoY in 2017 and 21% YoY in 2018 driven by sales growth of 10% YoY in 2017 and 9% YoY in 2018 and a widening in gross margin from 15.2% in 2016 to 17.0% in 2017 and 18.5% in 2018.

 

Top pick. Rate BUY with mid-2017 TP at Bt7/share. PCSGH is our top pick in the auto sector and we rate it BUY with mid-2017 TP at Bt7/share based on 17x PE, which is +0.5SD of its historical average. In our view, it deserves a premium valuation because of its production of high-value added products, i.e. elements of the powertrain system, giving it a high return on assets (ROA) at 11% in 2017, above 4-9% for peers. PCSGH’s share price has plummeted 51% from peak and the over-penalized share price offers an attractive investment return with 33% upside to our TP plus dividend yield of 5-6% p.a. in 2016-17.