Somboon Advance Technology

 

SAT’s price has dropped 18% from its July peak and underperformed the SET by 11% over the past three months, pressured by concerns about weak 3Q16 earnings, which we feel is overdone, since we believe the dip is not forming a trend. The improving economy points to a return of the Thai auto industry and with it, SAT’s earnings. SAT’s share is trading at 6.8x 2017 PE or 32% below its historical average. SAT is our top pick in the auto sector. BUY with TP at Bt18/share.

 

Weak 3Q16 is not a trend: auto industry and earnings are recovering. At the Opportunity Day meeting last week, SAT’s management guided to a slip in sales in 3Q16 YoY (but flat QoQ from Bt2.0bn in 2Q16). Though the dip YoY is not good news, we feel it is not a trend, as it is off a high base last year when Toyota launched its new Revo pickup model. We maintain our view that Thai auto production is headed for recovery in 2017 - and with it SAT’s earnings. Three factors support our view.

 

1 Improving economy. Auto production to tick back up in 2017. After a lengthy downtrend since 2014, domestic auto sales in 7M16 climbed up to be flat YoY; we believe domestic auto demand is clambering onto the path of recovery, encouraged by improving Thai economic key indicators: The farm income index grew 19% YoY in July, the fourth month of positive growth. July’s same-store sales growth for the Quick Service Restaurant (QSR) business in Thailand strengthened to ~4% for CENTEL (vs. +2.7% in 2Q16) and ~13% for MINT (vs. + 6.1% in 2Q16). With the domestic auto market returning and auto exports growing, we expect Thai auto production to resume its uptrend with 7% YoY growth to 2.1mn units in 2017 after negligible growth in 2015-16. Our auto production assumption is close to SAT’s own estimate of +5% YoY.

2 Improvement in tractor parts production. Another positive is an expected improvement in tractor parts production in 2H16 (14% of SAT’s sales in 1H16). SAT expects tractor production to drop by 5% YoY to 62K units in 2016. Since this fell 18% YoY in 1H16, this suggest it expects higher production in 2H16, underwritten by the launch of a new tractor model, a better economy and rising farm income.

 

3 New orders in 2017-18. SAT reports that an order to produce big truck parts with a value of Bt150-200mn/year has been delayed to 2017 from 3Q16. It is getting a new order for auto parts with a value of Bt300-350mn/year that it expects to start producing in late 2017 or the beginning of 2018.

Share price drop is overdone. Maintain BUY. SAT’s share price has dropped by 18% from peak in July and has underperformed the SET by 11% over the past three months. Valuation is undemanding at 6.8x 2017 PE or a large 32% below its historical average. We view the share price drop as overdone, as the weakness in 3Q16 is not a trend and in fact SAT’s core earnings are turning around to 27% YoY growth in 2017, tagging the recovery of Thailand’s auto industry and better tractor production. We maintain our BUY call on SAT at Bt18/share and keep it as our lead top pick in the sector.