Hana Microelectronics

Hana Microelectronics Plc (HANA)

Investment thesis
A full quarter of operational profit at the Ayutthaya plant and baht depreciation point to strong 3Q13 core earnings. Although sales normally fall QoQ in the fourth-quarter, we expect a new PCBA order and operational improvements to mitigate the effect of seasonality in 4Q13. For FY14, HANA’s sales should jump with the start-up of new capacity and GM expansion on a full year of operational profit at the Ayutthaya plant. In addition, huge insurance payouts during 4Q13-1H14 will boost sentiment toward the stock. HANA trades at an FY14 core PER of 9x, below its long-term average of 10x and our justified target PER peg of 12x. BUY!
Core profit expansion for 3Q13, both YoY and QoQ
We expect a 3Q13 net profit of Bt535m down by 17% YoY and 47% QoQ, as no insurance payouts were booked during the quarter (insurance payouts were reported for 2Q13 and 3Q12). Sales should post a rise of 12% YoY and 18% QoQ on seasonality and a greater number of IC assembly orders. GM is expected to post hefty expansion of 360 bps YoY and 100 bps QoQ to 12.5% on baht depreciation and margin improvement at the Ayutthaya factory, which was profitable for the full quarter. The SG&A-to-sales ratio would have dipped QoQ to about 5%. As such, core earnings should be Bt492m, up by 37% YoY and 21% QoQ. We also expect an FX gain of around Bt40m.
Fourth-quarter seasonal decline should be shallower than normal
4Q13 core earnings will soften QoQ on seasonality, but the seasonal effect will be milder this year. Normally HANA‘s fourth-quarter sales drop in the region of 9-15% QoQ. But for 4Q13, we expect sales to post QoQ slippage of only 4%, as new a PCBA order will mitigate the impact of seasonality. Moreover, an automated QC process will start operating in 4Q13; it should reduce costs and improve quality control.
Looking to FY14, we expect HANA to post hefty core profit growth of 40%, driven by: 1) the low base set by FY13, 2) margin expansion on a full-year recovery at the Ayutthaya plant and 3) stronger sales with the start-up of new capacity in 3Q14.
Anticipate further insurance payouts in 4Q13-1H14
Since 4Q11, HANA has received insurance payouts totaling Bt1bn for asset damage claims and Bt400m for business interruption from aggregate claims of around Bt1.2bn for asset damage and 1.2bn for BI. In 4Q13, management expects to book payouts of Bt190m for inventory damage and for a portion of its business interruption claim. We assume that the remaining claims will be paid by June 2014. The huge anticipated 4Q13-1H14 insurance payouts will strengthen HANA’s financial position and its ability to pay a dividend—we expect a yield of 7%.