Somboon Advance Technology

Somboon Advance Technology Plc (SAT)

Good momentum in 2H12. Thus far in third quarter, SAT shares have
underperformed peers as investors respond to its failure to meet expectations 2Q12.
However, better sales and gross margin in 2H12 will enable it to give a better showing,
with 2H12 earnings rising HoH, supporting share performance. SAT is expected to
deliver 90% core earnings growth in 2012 and 23% in 2013. We maintain BUY with mid-
2013 TP at Bt34/share (based on 13x PE).
Notes from Opportunity Day meeting:
- SAT raises 2012 sales target to Bt9.5bn or 48% YoY growth. The strong sales
in 1H12 and continuing strength in Thailand’s auto production has led SAT to raise
its 2012 sales target to Bt9.5bn or 48% YoY growth from its previous goal of 40%
YoY growth. The new target implies 14% HoH growth in 2H12.
- Improving gross margin in 2H12. SAT’s gross margin was weak in 2Q12 at 14%
due to outsourcing of casting products. It expects this to improve to 18% in 3Q12
and 20% in 4Q12, supported by stronger sales, improved productivity and better
operations at ICP2, a casting plant.
- Overseas project to finalize this year. SAT expects to finalize a joint venture
project with a local partner in Indonesia to produce axle shafts this year.
- L-T target. SAT targets sales growth at 20% p.a. in 2011-14 with gross margin at
20% in 2013.
SCBS view:
- Stronger earnings in 2H12. We expect core earnings to grow 31% HoH in 2H12 to Bt467mn from Bt358mn in 1H12 supported by higher sales (+7% HoH) and better gross margin (18.4% in 2H12 from 15.2% in 1H12) thanks to better operations at ICP2. We expect SAT to benefit from the steady rise in auto production: it is running at 75% utilization, giving it room to handle higher sales.
Improvement in ICP2 in 2H12 – after it passed its 2Q12 startup period – is expected to also improve gross margin. We expect ICP2 to become fully operational in 2Q13, giving a better gross profit margin at 19% in 2013 from 17% in 2012.
- Earnings fine-tuned: 90% core earnings growth in 2012 and 23% in 2013. We have adjusted two assumptions – sales and margin – and this nets a rise of 2% in 2012 earnings projection and 3% in 2013. Sales: We have raised our sales assumption by 15% for 2012 and 12% in 2013 to incorporate a raise in Thailand’s 2012 auto production forecast to 2.1mn units from 1.85mn units. Gross margin:
We also reduce our gross margin to 16.9% from 18.6% in 2012 because of the greater weakness than anticipated in 1H12. After the revision, SAT is still expected to deliver 90% core earnings growth in 2012 and 23% in 2013.