Armstrong Industrial Corporation

UOBKayhian on 25 Jul 2012

Valuations
· Downgrade to sell. Our target price of S$0.24 is based on 3-year historical average PE of 11.0x on our 2012F EPS of 2.2 cents. The only positive is that Armstrong has restarted its share buyback programme, having bought 461,000 shares at 27 cents each.
· Investors should also track the financial results and outlook of the HDD industry of Armstrong’s customer Western Digital set on 25 July.
What’s new
· Major semiconductor and hard disc drive (HDD) players have reiterated the weakening PC sales outlook, underscoring concerns of a global economic downturn. Advanced Micro Devices slashed its outlook for 2Q13 revenue after seeing floundering chip sales in China and Europe. We believe the gain in popularity of smartphones and tablets will also erode demand for personal computers and will indirectly impact the HDD industry. Similarly, semicon equipment maker Applied Materials has cut its revenue outlook due to a sudden drop in orders in its biggest market towards the end of the current quarter.
· The HDD segment contributes 22-25% of Armstrong’s revenue and HDD sales had declined 10.3% yoy to S$47.9m in 2011 as the flood in Thailand impacted the group’s key HDD customers. We forecast the weaker HDD outlook will shave another 10% off Armstrong’s 2012 HDD revenue.
· The group’s 1Q12 results had already reflected the challenging period ahead. Revenue declined 7% yoy to S$52.3m as turnover from the HDD segment fell 12.5% due to the aftermaths of the Thailand flood. Gross profit decreased 36.7% yoy to S$8.5m as higher material and labour costs eroded gross margin to 16.2% in 1Q12 from 23.7% in 1Q11. Excluding non-recurring items such as a S$2.7m fair value gain on derivative contracts and S$2.3m insurance claims in relation to the Thailand floods, Armstrong would have barely broken even.
Earnings revision
· We cut our net profit forecasts for 2012 to S$11.4m from S$17.1m to reiterate our bearish view on the data storage sector. But we still expect Armstrong to declare a dividend of 1.0 cents, providing investors a yield of 3.9% as of last traded price.