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Elec & Eltek - Poor Yangzhou Plant Execution

kiasutrader
Publish date: Mon, 04 Nov 2013, 10:17 AM
ELEC's  3Q13  results  came  in  below  expectations,  with  USD4.2m  in earnings  (-51.3% y-o-y) on the back of USD135.8m  in  revenue  (-1.2% yo-y). This was  due to the poor execution of its Yangzhou, China,  plant. Nonetheless, we believe that the worst is now over and we continue to like  the  stock  for  its  generous  dividends.  Maintain  BUY,  albeit  with  a lower USD2.27 TP (from USD2.50), based on a 14.2x blended FY14F P/E.
  • Mixed demand results in flat sales.  During the quarter  under review, ELEC  experienced  strong  demand  from  its  mobile  devices  and automotive customers,  with y-o-y segmental sales increasing 15.7% and 9.7% respectively.  This has offset the ongoing weakening demand from its  computer  and  computer  peripheral,  and  consumer  electronic customers, with sales declining by 11.4% and 5.5% y-o-y respectively. Nonetheless,  ELEC's topline came in below expectations,  given that  3Q is  historically  its  strongest  quarter,  as  customers  traditionally  ramp  up their production capacity for the holiday season during this period.
  • Disappointing  margins  linger.  Once  again,  ELEC  failed in  managing its newly set up Yangzhou, China,  plant  -  missing the facility's targeted production capacity. The group attributed this to what it claimed was the incompetence  of  the  previous  management  group,  which  allowed  the plant  to  incur  operating  losses  and  slowed  down  the  rationalisation process. This, ELEC said, resulted in a disappointing 3Q13 gross margin of 10.5% (-3.4 ppts y-o-y), similar to that posted in the previous quarter.
  • Look  forward  to  FY14.  Although  the  Yangzhou  plant  is now  in  better hands,  with  operational  efficiency  improving,  with  only  one  quarter remaining  in  FY13,  chances  of  a  turnaround  are  probably  over.  The management,  however,  remains  optimistic  about  the  company's  FY14 outlook, with  ELEC  aiming to obtain a higher market  share in the  highdensity interconnect (HDI)  and automotive segments. At the same time, it will continue with  its plant rationalisation process in order to improve margins.  Thus,  we believe that the worst is now behind  ELEC  and  that FY14 looks set to be a good year ahead.
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Elec and Eltek (ELEC) is one of the largest manufacturers of printed circuit boards (PCB) in the world.
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Source: OSK
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