Somboon Advance Technology

Somboon Advance Technology Plc (SAT)

We estimate SAT’s 2Q16 net profit at Bt115mn, up 77% YoY but down 24% QoQ. The YoY earnings improvement is driven by stronger sales aligning with rising auto production and a stronger gross margin while the QoQ earnings drop is due to seasonally lower sales. SAT’s earnings are recovering and its valuation is attractive at 7.7x 2017 PE, 22% below its historical average, to which the stock offers 29% upside. SAT is our top pick in auto sector. BUY with TP at Bt18/share.

 

2Q16 preview. We expect SAT to report net profit of Bt115mn, up 77% YoY but down 24% QoQ. The YoY earnings improvement is driven by stronger sales in tandem with the growth in auto production and stronger gross margin; the QoQ earnings drop is from seasonally lower sales. It will announce results on August 9. Key elements:

 

 Sales Bt2.0bn, up 9% YoY but down 10% QoQ, aligning with the better industry outlook. Thai auto production in the quarter was at 487K units, up 19% YoY but down 4% QoQ due to long holidays. We note that SAT’s sales in 2Q15 were an exceptionally low base after Toyota, SAT’s major client at ~30% of total sales, slowed its Vigo pickup production for the new Revo model launch in 3Q15.

 

 Wider gross margin at 14% in 2Q16, up from 11.8% in 2Q15 and 13.9% in 1Q16. The YoY widening comes from higher sales and QoQ widening from SAT’s cost control program, overcoming the QoQ fall in sales.

 

Operational update. Management has a more positive view on the domestic auto market but is cautious on the outlook for auto exports. It expects auto production to reach 1.9mn units in 2016, relatively flat YoY. It expects its sales to slip a bit in 3Q16 YoY (but improve QoQ); we view this as temporary due to the high base last year when Toyota launched its new Revo pickup model. A good development is an expected improvement in tractor parts production (14% of 1H16 sales) after a fall of 18% YoY in 1H16. Underwriting this is the launch of a new tractor model, a better economy and rising farm income. SAT is getting new order for auto parts with a value of Bt300-350mn/year that it expects to start producing in late 2017.

 

Top pick. Maintain BUY with TP at Bt18/share. We maintain our BUY call on SAT at Bt18/share and keep it as our top pick in the sector. SAT’s earnings are turning around, tagging the recovery of Thailand’s auto industry. Share price has plummeted 57% from its peak in 2013 and valuation is attractive at 7.7x 2017 PE, 22% below its historical average, to which the stock offers 29% upside.