Elec and Eltek (E&E) reported a weak set of 3Q12 results with US$8.5m in profits (-45.1% YoY) and US$137.4m in revenue (-17.6% YoY). 9MFY12 PATMI of 25.6m came in below expectation due to 1) weaker sales as a result of the slump in the PC industry as well as 2) poorer margins attributable to higher manufacturing overhead. As such, we lower our FY12 and FY13 earnings estimates by 22.9% and 25% respectively. Moving on, while business environment remains challenging, we are confident that the group has little problem paying out most of its earnings as dividends, translating to an attractive FY12 yield of 8.2%. Maintain NEUTRAL with a new TP of US$2.23 based on 10x blended FY12/13 PATMI.

Steep decline in sales amid PC slump. Once again, despite strong demand for E&E's High Density Interconnect (HDI) PCB (for communication & network customers), its traditional PCB business (for computer & computer peripheral customers) declined by approximately 28% YoY for the 9MFY12 amid PC market slump. With IBM reporting poor 3Q results and Dell losing market share, demand from these two companies weakened, making way for Samsung and Ericsson to become E&E's top two largest customers in 3Q. Communication & network segment now account for 30% the group's revenue.

Manufacturing overhead affect margins. As expected, gross margin in 3Q declined further by 2.4 ppts QoQ to 13.0% largely due to 1) US$2m start-up costs of the new Yangzhou plant, 2) higher electricity charges (+25% YoY) and 3) wage hikes across mainland China and Hong Kong.

'but yield remains attractive. Going forward, though management is cautious over its customers' order intake, they are confident about maintaining its earnings payout ratio which has been above 90% for the past three years as the group is able to maintain its capex at the same level as depreciation expenses.

Source: OSK