Singapore Company Focus Amtek Engineering Refer to important disclosures at the end of this report Bloomberg: AMTK SP | Reuters: AMTK.SI DBS Group Research . Equity 13 Feb 2015 BUY S$0.63 STI : 3,419.17 Higher margins drive profitability Price Target : 12-Month S$ 0.85 (Prev S$ 0.74) Reason for Report : 2Q15 results, raising earnings/TP Potential Catalyst: strong quarterly results DBS vs Consensus: In line 2Q15 net profit of US$11.3m (+74% y-o-y, +180% qo-q) beat our estimate of US$9m Better than expected performance in automotive and telecommunications segments Higher margins are likely to be sustained with better product mix while revenue momentum is intact going into 2H15. Maintain BUY, TP raised to S$0.85 Analyst Sachin MITTAL +65 6682 3699 [email protected] First full quarter since Interplex consolidation. 2Q15 revenue grew to US$263m (+60 y-o-y, + 17% q-o-q) primarily due to consolidation of Interplex. 1Q15 had recognised only 2 months of revenue from Interplex and 1Q15 earnings were also affected by one-off integration cost of US$4.7m. In addition, better than expected performances from automotive and telecommunication segments also helped Amtek beat our expectations. This offset weaker performance from several other segments. Price Relative S$ Relative Index 1.4 211 1.3 191 1.2 171 1.1 1.0 151 0.9 131 0.8 111 0.7 91 0.6 71 51 0.5 0.4 Feb-11 Feb-12 Feb-13 Amtek Engineering (LHS) Forecasts and Valuation FY Jun (US$ m) Revenue EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (S cts) EPS Pre Ex. (S cts) EPS Gth (%) EPS Gth Pre Ex (%) Diluted EPS (S cts) Net DPS (S cts) BV Per Share (S cts) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Consensus EPS (S cts): Other Broker Recs: 2013A 626 61 34 27 27 6.7 6.7 (20) (20) 6.7 3.6 40.4 9.4 9.4 8.5 5.0 5.7 1.5 0.2 17.1 Feb-14 31 Feb-15 Relative STI INDEX (RHS) 2014A 633 51 23 18 18 4.3 4.3 (35) (35) 4.3 3.9 41.4 14.4 14.4 4.7 5.7 6.2 1.5 0.2 10.6 2015F 985 104 45 31 31 7.6 7.6 76 76 7.6 3.8 45.2 8.2 8.2 8.6 4.5 6.1 1.4 1.1 17.6 2016F 1,006 106 49 35 35 8.6 8.6 13 13 8.6 4.3 49.5 7.3 7.3 3.6 4.2 6.9 1.3 0.9 18.2 B: 2 15 9.1 S: 0 8 10.6 H: 1 ICB Industry : Industrials ICB Sector: Industrial Engineering Principal Business: High precision metal/plastic components: from tooling, stamping to cold forging and mechanical assembly. Source of all data: Company, DBS Bank, Bloomberg Finance L.P www.dbsvickers.com ed: JS / sa: AS Automotive segment, cost savings likely to drive margins. Higher contribution from high margin segments such as the Automotive has improved Amtek’s bottom-line. In addition, Amtek is yet to fully exploit opportunities to cross sell products after the acquisition of Interplex. Interplex has relationships with original equipment manufacturers (OEMs) including brands like Continental, Denso in Automotive and Apple in mobile devices. This could spur growth particularly in the automotive segment. Furthermore, there is room for cost savings which could boost margins over next 2-3 years. FY15F/16F earnings raised 15%/8% on improved margin assumptions. Our FY15F earnings are still conservative as we assume seasonal slowdown in 3Q15 and 4Q15 which may not be the case this time. Our target price is raised to S$0.85 pegged at 11x FY15F EPS, similar to its 4year historical average but still at ~15% discount to peers. The stock also offers 6% yield as an added bonus. At A Glance Issued Capital (m shrs) Mkt. Cap (S$m/US$m) Major Shareholders Standard Chartered (%) Metcom Group (%) Free Float (%) Avg. Daily Vol.(‘000) 546 341 / 251 29.9 28.2 41.9 205 Company Focus Amtek Engineering INVESTMENT THESIS Profile Amtek is a precision engineering service provider. Its main segments include automotive, networking and enterprise servers, industrial products, mass storage and telecommunications segments. Rationale Automotive segment to see steady growth Key automotive markets such as the US are expected to see steady growth with better consumer spending and low fuel prices. Furthermore, the automotive products have longer life cycles which should contribute to stable performance in the segment. Cross-selling and cost cutting opportunities Interplex’s relationship with leading OEMs in segments such as automotive and telecommunication offers cross selling opportunities that Amtek could exploit. Interplex operates from too many factories which may also be consolidated in the medium term Valuation Target price of S$ 0.85 is pegged at 11x FY15E EPS, similar to its 4-year historical average but at 15% discount to peers average of 13x. Risks Slower than expected growth in key markets Slower growth in key markets such as US and China could drag down Amtek’s profitability. Increase in wage rates Main operating countries such as China are seeing escalating wage costs which could affect margins Source: DBS Bank Automotive contributed 24%of group revenue in 1H15 versus 13% in 1H14 Gross margin has risen sharply since 3Q14 Source: Company Source: Company Page 2 Company Focus Amtek Engineering Key Assumptions FY Jun Gross margin (%) SGA as % of sales Effective Tax Rate (%) Segmental Breakdown FY Jun Revenues (US$ m) Casings & Enclosures Mass Storage Consumer Electronics Automotive Others Total Income Statement (US$ m) FY Jun Revenue Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net Profit before Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) Source: Company, DBS Bank Page 3 2012A 2013A 2014A 2015F 2016F 16.4 9.5 18.4 14.8 10.1 18.6 14.8 9.9 22.5 17.4 10.9 31.0 17.5 10.9 28.0 Improving gross margin due to better product mix 2012A 2013A 2014A 2015F 2016F 170 103 95 104 202 675 172 81 91 97 185 626 181 76 84 100 192 633 166 72 80 261 406 985 166 68 83 274 415 1,006 2012A 2013A 2014A 2015F 2016F 675 (565) 110 (63) 48 1 2 (6) 0 44 (8) (2) 0 34 34 72 626 (533) 93 (61) 32 6 1 (5) 0 34 (6) (1) 0 27 27 61 633 (539) 94 (61) 33 (3) 1 (8) 0 23 (5) 0 0 18 18 51 985 (813) 171 (105) 66 (3) 1 (20) 0 45 (14) 0 0 31 31 104 1,006 (830) 176 (108) 68 (3) 1 (18) 0 49 (14) 0 0 35 35 106 (1.0) (18.0) (29.2) (25.7) (7.3) (16.3) (32.3) (20.0) 1.1 (15.1) 1.1 (34.7) 55.5 102.4 102.7 75.9 2.1 1.5 2.4 12.8 16.4 7.1 5.0 21.8 6.9 12.6 58.4 7.8 14.8 5.2 4.3 17.1 5.7 8.6 53.6 6.0 14.8 5.2 2.8 10.6 3.3 6.7 88.8 4.1 17.4 6.7 3.1 17.6 4.6 9.6 50.0 3.4 17.5 6.8 3.5 18.2 4.7 9.5 50.0 3.9 Automotive segment seeing growth Margins Trend 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 2012A 2013A Operating Margin % 2014A 2015F 2016F Net Income Margin % Consolidation of Interplex is key driver of growth Company Focus Amtek Engineering Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (US$ m) FY Jun (10.8) (25.5) (35.1) (71.3) 3.4 18.9 25.6 (3.9) 48.4 105.5 138.5 126.3 16.6 20.8 22.7 179.6 15.3 5.1 3.9 12.8 3.7 1.3 14.2 4.5 1.2 17.7 7.2 1.8 17.6 7.6 4.3 2012A 2013A 2014A 2015F 2016F 115 8 9 110 57 146 29 474 113 9 10 93 50 142 55 471 131 9 13 229 48 140 30 600 182 10 113 103 75 224 30 737 167 11 113 131 77 228 30 758 ST Debt Creditor Other Current Liab LT Debt Other LT Liabilities Shareholder’s Equity Minority Interests Total Cap. & Liab. 69 125 51 59 6 151 12 474 100 111 46 35 5 163 11 471 97 110 47 163 5 167 10 600 147 169 59 163 5 183 10 737 147 172 59 163 5 200 10 758 Non-Cash Wkg. Capital Net Cash/(Debt) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X) 55 (18) 80.6 83.4 38.5 1.4 1.4 1.0 0.1 0.1 11.0 2.8 89 (42) 84.0 84.3 38.0 1.3 1.3 0.9 0.2 0.3 25.5 2.7 61 (32) 81.3 78.0 34.4 1.2 1.8 1.4 0.2 0.2 14.8 2.3 101 (208) 67.4 65.8 29.1 1.5 1.1 0.9 1.1 1.1 61.1 0.0 104 (180) 82.0 78.7 35.0 1.3 1.2 0.9 0.9 0.9 8.0 0.0 Page 4 30% 20% 100 10% 0% 50 -10% 0 -20% Revenue Revenue Growth % (QoQ) High margin product mix and absence of exceptional losses improved 2Q15 bottomline Asset Breakdown (2014) Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets Source: Company, DBS Bank 40% 150 1Q2015 (2.9) (14.0) (22.2) (13.4) 50% 200 4Q2014 263 (217) 46 (26) 20 0 0 (5) 0 15 (4) 0 11 11 31 3Q2014 226 (186) 40 (24) 16 0 1 (5) (5) 7 (3) 0 4 9 25 2Q2014 152 (130) 22 (14) 7 0 0 (4) (1) 3 (1) 0 2 2 12 1Q2014 147 (128) 19 (13) 5 0 0 (2) (2) 2 (1) 0 2 3 10 4Q2013 165 (139) 25 (16) 8 0 0 0 0 8 (2) 0 6 6 14 60% 250 3Q2013 2Q2015 2Q2013 1Q2015 1Q2013 Revenue Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Net Profit Net profit bef Except. EBITDA Revenue Trend 4Q2014 4Q2012 Quarterly / Interim Income Statement (US$ m) FY Jun 2Q2014 3Q2014 Debtors 25.1% Net Fixed Assets 23.5% Assocs'/JVs 1.5% Inventory 8.7% Bank, Cash and Liquid Assets 41.1% Company Focus Amtek Engineering Cash Flow Statement (US$ m) FY Jun Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Currency Adjustments Chg in Cash Opg CFPS (US cts.) Free CFPS (US cts.) Capital Expenditure 2012A 2013A 2014A 2015F 2016F 44 22 (10) (2) 2 1 57 (14) 0 0 1 1 (13) (34) (14) 0 (2) (50) (3) (9) 10.0 7.7 34 21 (7) (1) (7) (10) 30 (34) 0 0 0 (2) (36) (16) 6 0 (3) (12) 2 (17) 6.7 (0.8) 23 20 (4) (1) 16 (1) 54 (39) 0 0 0 12 (26) (14) (26) 0 150 109 (1) 136 6.9 2.7 45 39 (2) (1) (52) 0 29 (190) 0 0 0 0 (190) (15) 50 0 0 35 0 (126) 14.8 (29.2) 49 39 (14) (1) (3) 0 70 (25) 0 0 0 0 (25) (17) 0 0 0 (17) 0 28 13.2 8.2 200 180 160 140 120 100 80 60 40 20 0 2012A 2013A Target Price & Ratings History S$ S.No . 0.72 1: 0.67 0.62 1 0.57 0.52 0.47 Feb-14 Jun-14 Oct-14 Feb-15 Not e : Share price and Target price are adjusted for corporate actions. Source: DBS Bank Page 5 2015F Acquisition of Interplex Source: Company, DBS Bank 0.77 2014A Capital Expenditure (-) Cl o s i n g Ta rg e t Pri c e Pri c e 28 Jan 15 0.64 0.74 Da te R a ti n g Buy 2016F Company Focus Amtek Engineering DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. 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Compensation for investment banking services: DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates have received compensation, within the past 12 months, and within the next 3 months may receive or intends to seek compensation for investment banking services from the Amtek Engineering. Page 6 Company Focus Amtek Engineering DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. 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