SG: Amtek Engineering (AMTK SP) Tech | Outlook Dims but Yield Supportive

HOLD | Share price: SGD0.625 | Target price: SGD0.69 (from SGD1.11) | Downside 9.0%

A mixed bag. We are downgrading Amtek to a HOLD. Although FY12 results were within expectations, results were boosted by a lower effective tax rate. In addition, the outlook has dimmed with more major customers cutting their outlooks than those who raised. We do not expect the stock to have any upside for now given its uncertain earnings outlook, but the still-attractive dividend yield of 6.1% (based on lower DPS forecast) should support the stock on the downside.

Barely within expectations. Amtek reported net profit of SGD33.6m, slightly above our forecast of SGD33m. Revenue decline (-2% in 4Q12, -1% for the full year) was within expectations, as was full year gross margin of 16.4% (-1.4 percentage points YoY). However, we estimate about 3% of Amtek’s full year profit came from a lower-than-expected provision for tax in the final quarter, as effective tax rate fell to 11% in 4Q12 compared to its normal 22% tax rate.

Turning cautious. We expect FY13 to start off on a weak note. Three major customers in the casing & enclosure (25% of group revenue) are not doing well, and have recently cut guidance. Automotive (15% of sales) is slowing faster-than-expected as demand wanes in China and Europe. Amtek expects 2H13 to benefit from new enterprise casing programs with a key customer, but the expected new launches may very well be delayed.

Cutting forecasts. As a result, we have cut our FY13 forecast by 17%. Although FY12 DPS of 4.5 SGD cents was within expectations (4.2 cents forecasted), we expect FY13 DPS to be lower at 3.8 SGD cents on lower forecasted earnings. Its dividend policy is “up to 55% of NPAT”. Also, we expect capex to rise, driven by an ambitious automation program worldwide. While this is positive in the long term, it will create a greater funding strain in the short term.

Downgrade to HOLD. At the current share price, Amtek is fairly valued at 9x FY13 earnings, inline with global peers. We do not expect the stock to have any upside for now given its uncertain earnings outlook, but the still-attractive dividend yield of 6.1% (based on lower DPS forecast) should support the stock on the downside.

Source: Maybank Kim Eng Research - 27 August 2012