Hana Microelectronics

Hana Microelectronics Plc (HANA)
Core profit beat our estimate and was far ahead of the street
HANA reported a 3Q13 net profit of Bt567m, down by 44% QoQ and 5% YoY. Stripping out extra items, core earnings would be Bt524m, up by 65% YoY and 29% QoQ—6% above our estimate and 22% ahead of the consensus. The better core number was due largely to a fatter gross margin than modeled. The firm announced an interim dividend of Bt0.5/share (XD on Nov 26).
Results highlights
The top-line rose by 17% QoQ and 11% YoY. The QoQ increase was driven by seasonality and a weaker baht; the YoY growth was due to stronger external demand and a bigger contribution from the Ayutthaya plant. PCBA sales rose by 12% YoY and IC sales by 8% YoY. GM was 14.9%, expansion of 340 bps QoQ and 600 bps YoY and significantly above our assumption of 12.5%. The fatter GM was due to baht depreciation and margin improvement, as the Ayutthaya factory achieved break-even for the full quarter.
Other expenses jumped to Bt116m from a normal level of Bt5-7m on a provision for assessed tax obligations. The SG&A/sales ratio dived 100 bps QoQ to 4.4% on higher sales. HANA also booked an FX gain of Bt43m. The debt/equity ratio was only 0.3x at end-Sept.
Outlook
Normally core earnings drop in the fourth-quarter on seasonality. However, in 4Q13 we expect new PCBA orders to mitigate the effect of seasonal impact. A customer of HANA’s is shifting its strategic focus to the tablet component market (which has greater scope for growth than the PC component market). That will add to the firm’s 4Q13 sales. Looking to FY14, we expect HANA to post strong core earnings growth of 39%, driven by margin expansion on a full-year recovery at the Ayutthaya plant and new sales enabled by the start-up of new capacity in 3Q14.
What’s changed?
We have trimmed our FY13 earnings forecast by 4% to reflect a provision for assessed tax under “other expenses”. But our FY13 and FY14 core profit projections and target price stand unchanged.
Recommendation
HANA currently trades at an FY14 core PER of 9x, below its long-term average of 10x. We believe the stock deserves a premium, due to its strong core earnings growth profile, backed by sales and GM expansion with a full year of operational profits at the Ayutthaya plant and the start-up of new capacity by 3Q14. Furthermore, huge insurance payouts during 4Q13-1H14 should boost sentiment toward the stock. We maintain our BUY rating.