P.C.S. Machine Group Holding

P.C.S. Machine Group Holding Plc

 

4Q14 earnings were below our expectation 

PCSGH posted a 4Q14 net profit of Bt88m, down by 60% YoY and 54% QoQ. The result was 60% below our estimate and the Bloomberg consensus, due lower sales than assumed and GM squeeze. 4Q14 sales were 19% short of our projection, due to delayed orders, especially for direct exports to Brazil. FY14 earnings plunged 48% YoY to Bt717m, which represents only 80% of our projection of Bt900m.

Results highlights

Revenue dropped by 19% YoY and 15% QoQ to Bt880m. The top-line was 11% below our estimate—car makers shifted back delivery dates for part for parts, especially direct exports to Brazil. Thus, PCSGH reported GM of 10.4%, down from 21.0% in 3Q14 and 22.1% in 4Q13 (we had modeled for 23.5%). Likewise, 4Q14 net margin was 10.0%, down substantially from 18.4% the previous quarter and 20.1% in 4Q13 (we had assumed 18%). 

Outlook

We anticipate that 1Q15 profit will be flattish YoY but up substantially QoQ (in tandem with recovering auto production and the delivery of orders that were postponed from 1Q15).

What’s changed?

Because of the weak 4Q14 results, we have slashed our PCSGH earnings forecasts by 23% for FY15 to Bt1.1bn and by 21% for FY16 to Bt1.2bn. These revisions factor in slimmer gross margin assumptions of 25% in FY15 and 25% in FY16 (we had previously modeled for 28% for both years). 

Recommendation

The automotive industry should start recovering this year, led initially by exports, followed by stronger consumption spending in 2H15. PCSGH’s earnings hit bottom in 4Q14, we believe. Thus, share price risk from here appears limited, given the stock repurchase program. However, our earnings cuts prompted us to reduce our YE15 target price from Bt11.30 to Bt9.1, still pegged to a justified PER of 12x. As such, we have downgraded our PCSGH rating from BUY to HOLD.