Somboon Advance Technology
Raise to buy on attractive risk-reward picture BUY
Somboon Advance Technology Plc (SAT)
Upgrade to BUY on attractive risk-reward. SAT’s share price has underperformed the market by 25% QTD and its valuation has plummeted from peak at 14x 13PE in February to 9x now, below its long-term historical average of 10x. At this low valuation, we see limited downside with large upside gain of 32% to our TP. The attractive risk-reward picture prompts us to upgrade SAT to BUY from Neutral with 2013 TP of Bt29/share. We see the dip in earnings in 2Q13 as an opportunity to accumulate the stock ahead of the better earnings in 2H13.
2013 guidance. In 2013, SAT estimates auto production at 2.6mn units, and with positive long-term prospects, targets 3.0mn units in 2016. SAT has a goal of 10% sales growth, 17-18% gross margin (up from 16% in 2012 thanks to less outsourcing of casting products at ICP2), and a net margin of 9% (from 8.5% in 2012) in 2013. It has budgeted Bt1.8bn CAPEX in 2013-14 mainly for capacity expansion.
Expanding non-auto business. SAT aims to diversify its revenue and earnings bases to non-auto business as this will help dilute risks in the automotive industry. Key to this is Kubota, an agricultural tractor manufacturer and SAT’s client. Kubota has an aggressive production goal in 2013 of 62-65K units, 7-12% growth from 58K units in 2012. On this basis, SAT expects revenue contribution from Kubota to increase to 15% of total revenues in 2013 from 10% in 2012.
Overseas project delays. SAT said that its project overseas - to produce axle shafts in Indonesia - has had to be postponed after it lost the orders from one client. It is now negotiating with a new client with no specific timeframe for finalization. We are in a sense relieved by the delay since we were uncertain of the success of the overseas project given SAT’s lack of experience overseas.
2Q13F slip – time to accumulate for stronger 2H13. SAT’s earnings are likely to soften in 2Q13 in tandem with the slowed auto production brought by the long holidays in the quarter. We expect earnings to get back into higher gear in 2H13 from: 1) higher sales in 2H13 and 2) new orders to produce parts for Kubota that we estimate will add ~Bt100-150mn to sales in 4Q13 and 3) wider gross margin (17.7% in 2H13 vs. 16.9% in 1H13) from better operations at casting plant ICP 2 and a higher margin on parts for Kubota.
