Somboon Advance Technology

Somboon Advance Technology Plc (SAT)  

 

Investment thesis

We perceive that the automotive industry should recover in FY16—the worst of the fallout since the first-time-car-buyer scheme’s collapse in sales in 1H15 is behind us. SAT is expected to deliver better 2H15 from YoY onwards, led by increased capacity utilization to 70% (from 60% in 1H15 and 70% in FY14). And, SAT was granted new parts orders for Hino big trucks, Kubota tractors and rising sales from SFT (subsidiary) in FY16. We keep our FY15 earnings forecast of Bt588m, down 9.5% YoY, then a 32% bounce in FY16 to Bt777m. Given 2H15 earnings recovery and good outlook in FY16, we have rolled over our SAT’s target price to Bt21.00 for FY16, which is +0.5 SD over its long-term mean of 10x. We have upgraded SAT rating to BUY from HOLD.

Moderate recovery in 2H15 with at least 15% rise HoH in sales

SAT’s management sets its 2H15 sales growth guidance at 15% HoH, driven by return orders from Toyota, Mitsubishi Triton, Isuzu D-Max, Hino (big trucks) and Kubota tractors after their new model changes in 2Q15. Again, SAT anticipates nationwide auto production of 1.9m units (up 1% YoY) in FY15 and 2.0m units in FY16 (up 3-4%). Note that SAT has diversified production into parts for big trucks for Hino (to export) and agricultural vehicles for Kubota (tractors—from 65k units in 2014 to 71k units in 2015). We forecast its sales growth of 1% in FY15 and 7% in FY16, in line with management guidance. The firm sets CAPEX of Bt590m in FY15 and another 500m in FY16.

Capacity utilization will rise gradually

SAT is building a new production line that will make parts for big trucks and new orders for Toyota, Kubota and Mitsubishi, from which revenue is slated to start flowing in 2H15. Thus, its capacity utilization will rise in 2H15 to the run rate of 70% after dropping to 53% in 2Q15. SAT expects its FY15 run rate to be in range 65-70% on rising orders, as noted above. The firm sets its FY16 run rate of over 70%.

Net profit margin will be 6-7% in FY15 and 8-9 in FY16

Given bigger sales target and efficiency improvements in FY16, the firm guides for FY16 gross margin of 16-17% (from 16% in FY15). We conservatively assume GM of 16% and NM of 7.2% in FY15 and GM of 17.0% and net margin of 8.9% next year. We have seen scope for upside if the SAT delivers good FY15 and FY16 net profit margins over targets.

Earnings in 3Q15 to post YoY recovery

We estimate SAT’s 3Q15 profit to be Bt178m, up 25% YoY and 173% QoQ, due to higher YoY sales. Our 3Q15 model assumes that sales rose 15% QoQ and 5% YoY to Bt2.1bn. We forecast its 3Q15 GM of 16.9%, up from 15.8% in the same period last year due to higher sales volume and well managed OPEX.