Somboon Advance Technology

Somboon Advance Technology Plc (SAT)

Downgrade to Neutral. Thailand’s automotive industry is returning to normal in
terms of auto production, with flat growth in 2014, and will then resume its uptrend
with 8% growth in 2015. Unfortunately it does not appear that SAT will tag along with
this industry recovery, as it lost a major client’s orders. Earnings recovery path will thus
lag the industry and peers. On this basis we downgrade SAT to Neutral (from BUY) and
reduce mid-2014 TP to Bt20 from Bt22 based on 11.0x PE, its historical average.
Bad news: lost orders. At the analyst meeting, management said that it had lost
orders from a major client to produce spring parts for the client’s new car model that
will be launched in late 2014. SAT estimates this will slash sales ~Bt700mn/year, or 8%
of total sales, starting in 4Q14. SAT expects new orders to produce parts for big trucks
with total value of ~Bt1.0bn, or 11% of total sales, will provide some offset but
production for the new orders will not begin until 2Q15-2016. SAT has cut its 2013
utilization rate to 85-90% from 90-95% in response to the lower orders and its sales
growth target to -3% from the earlier expectation of 2-5% growth.
Earnings revision. We have thus lowered SAT’s core earnings by 8% in 2013, 24% in
24% and 27% in 2015 to incorporate: 1) cuts in sales assumption of 4% in 2013, 12% in
2014 and 12% in 2015 to factor in lower utilization rate and loss of orders and 2) lower
gross margin to 16.1% in 2014 (from 17.3%) and 16.2% in 2015 (from 17.8%). After the
earnings revision, SAT’s sales growth is estimated at -2.4% in 2013, +1.9% in 2014 and
+5.9% in 2015. It is expected to report core earnings growth of -6.5% in 2013, +2.9% in
2014 and +7.9% in 2015. Its non-auto clients, such as Kubota, an agricultural tractor
maker, will be key to its sales growth in 2014. In 2015, SAT’s projected 5.9% sales
growth is less than projected auto production growth of 8.0% on the full year impact
of the fall in sales brought by the loss of these orders – and no complete offset by new
orders.
3Q13F preview. We estimate SAT’s 3Q13F core earnings at Bt167mn, down 33% YoY
and 13% QoQ from: 1) weak sales of Bt2.2bn, down 10% YoY and 3% QoQ and 2) gross
margin at 16.5%, flat YoY and QoQ. Our 2013 earnings estimate suggests 4Q13F core
earnings at Bt144mn, the bottom for the year.