Somboon Advance Technology

Somboon Advance Technology Plc (SAT) 

Investment thesis: The flooding has prompted us to cut our FY11 SAT profit forecast 32% to Bt470m in order to reflect squeezed GM, especially in 4Q11. But we now project a 109% jump in FY12 earnings to a new record of Bt980m (we earlier modeled for only Bt930m). As such, SAT trades at a cheap FY12 PER of 6.9x (comparable to its PER following the March 11 earthquake in Japan). Given our expanded expectation for FY12 earnings, we have raised our YE12 target price 6.8% to Bt23.50. Our BUY rating stands!
Sales will fall 40% in 4Q11; recovery in 1Q12: SAT guided that assembly plant shutdowns by Honda, Toyota and Nissan will mean a 40% plunge in its 4Q11 sales (in line with our forecast). Its factories operated at a mean run rate of 65% in Oct and management estimates a 50% rate for Nov. SAT expects capacity utilization to bounce back to 80% in Dec, as Toyota and Nissan resumed operating on Nov 14. The firm also believes it will make up for lost 4Q11 production in 1H12. Our FY11 sales forecast is in line with company guidance.
GM—much fatter next year: Because the orders from SAT’s biggest customers plunged in October and November, it has cut its FY11 GM guidance to 14-15% from 18% formerly. As such, we have revised down our FY11 GM assumption to 14.5% from 19.0%—less scale meant substantially higher per-unit production costs. We expect the firm’s FY12 GM to bounce back to 19.5% on a normalized operation. Given the slimmer FY11 GM, we have cut our FY11 profit forecast 32% to Bt470m (down 10% YoY).
Strong capacity expansion-led FY12 growth: SAT plans to expand production capacity for axle shafts (its main product), coil springs and stabilizer bars by 33%, 74% and 80%, respectively, next year in order to cater to upcoming new model launches and catch up on lost 4Q11 production. We have raised our FY12 sales growth forecast to 22% from 17% based on our expanded expectation for sales and have upgraded our FY12 profit forecast 5.3% to Bt980m.