In view of the deteriorating outlook for HDD as well as the automotive industry, we cut our earnings forecast for FY12 by 18.8% to S$10.8m and downgrade the stock from BUY to SELL. It should be noted that the stock has been able to trade at a high P/E band with an average of 11.5x thanks to its good dividend payout. However, in view of the challenging environment, we now expect the group to reduce its payout for the next year. It is expected to produce S$2m core profit for the upcoming 2Q results while there is a high likelihood that interim dividends will be omitted. The new TP of S$0.21 is derived after pegging blended FY12/13 earnings to 8.8x P/E (-0.5 SD 5-yr historical average).

Gloomy HDD outlook. Given Seagate and Western Digital's gloomy forecasts, we turn negative on Armstrong and cut its HDD revenue forecast for FY12 by 9.5% to S$45.5m. Beside the HDD segment (representing 22% of Armstrong business), its other business segments are also not expected to perform well.

Weakening automotive industry in China. Armstrong's largest business segment automotive business contributed 35.2% of the group's FY11 revenue. Recent figures from the China Association of Automobile Manufacturers indicate that the growth of auto sales has slowed due to the weakening consumer demand in China and restrictive policies in place. Sales of commercial car during the first
four month of 2012 declined 11.6% YoY to 1.37m units. Adding to that, following the likes of Shanghai and Beijing, Guangzhou has also implemented auto curb policy, limiting new license to 120k annually. This sent a worrying signal to the market as it could mean that more cities may follow suit, weighing down the already poor consumer demand. As such, we expect Armstrong's automotive
business which mainly derives its sales from China to be negatively impacted.

Source: OSK