Armstrong's 2Q12 results came in largely in line with our forecasts with S$2.1m PATMI (+2.0% YoY) on the back of S$55.0m in sales (+4.4% YoY). As predicted, the  PC  industry  slump  and  slowdown  in  China  weighed  down  the  group's performance despite of the production capacity recovery in Thailand. Moving on, while  we  remain  cautious  over  the  industry  outlook,  we  are  encouraged  by  the group's abilities  in  opening  up  new  business  opportunities,  albeit  with  higher SG&A expenses. Most notably, there  is a  good chance that  Armstrong will start supplying foam components to Western Digital (WD), boosting its HDD business from  4Q  onwards.  In  view  of  this  possible  surprise,  we  upgrade  our recommendation to NEUTRAL with a new TP of S$0.25, based on 8.8x blended FY12/13 earnings (-0.5 SD 5-yr historical average).

2Q  performance  reviewed. While Office Automation and Automotive segments remained  strong,  HDD  and  Consumer  Electronic  segments  continued  to  drag down the group's sales performance  due  to  the  PC  industry  weakness  and China's economic slowdown. falling by 10.9% and 3.3%  respectively.  Gross margin improved QoQ  by  3.6  ppts to 19.8%  largely  attributable to 1) production recovery  of  Thailand  facilities  and  2)  enhancing  ASP  for  HDD  products  (+5.8% QoQ). Moving into 2H, we expect gross margin to improve back to 22%.

New business to contribute in 2H. Despite industry outlook remains uncertain, Armstrong  manages  to  secure  new  reputable  customers  which  are  expected  to contribute  from  2H  onwards.  Not  only  will  the  group  supply  rubber  parts  for Dyson's  vacuum  cleaner,  it  will  also  kick  start  its  projects  for  BMW  and Mercedes.  Most  importantly,  the  group  has  recently qualified to become WD's foam component supplier (previously only supplying rubber parts). It is currently in final stage of negotiation for mass orders commencing from 4Q onwards.

Source: OSK