Broadway Industrial Group

DBS Group Research, Nov 6

EXCLUDING forex and one-off items, Broadway reported net loss of S$1.6 million, compared to losses of S$2.3 million in Q2 2013 and S$5 million in Q3 2012. Results missed our S$2.5 million profit forecast although sales were in line at S$165 million. Gross margins were firm at about 8 per cent but higher sales and administration costs as well as interest expense eroded net profit. More borrowings for capital expenditure investments led to a higher gearing of 0.78 from 0.67 in Q2 2013.

As hard disk drive (HDD) sales stabilised at around S$90 million, losses at the Ebit level narrowed substantially to a mere S$0.1 million from a loss of S$2.8 million in Q3 2012. Elsewhere, the non-HDD segments were dragged down by higher start-up costs for new mobile programmes while contribution from foam plastics shrunk because of a less profitable product mix.

Broadway has met only 25 per cent of our full-year estimates as of 9M 2013. A H2 rebound would be challenging as HDD is expected to be flat for another year, while non-HDD is taking longer to cultivate and the group's move to right-size operations is progressing slower than desired.

Maintain "hold". We cut FY2013/FY2014 earnings estimates by 44-49 per cent to reflect higher cost assumptions. We believe share price should hover around current levels of 0.5-0.6 times P/B and only re-rate if there is a significant turnaround. Target price is cut to S$0.25 based on 0.5 times P/B, the lower end of its historical P/B band.

HOLD

Broadway Industrial Group

UOBKayhian on 22 Feb 2013

Valuations

·         Broadway is trading at 8.9x 2013F PE and 0.73x P/B with a dividend yield of 4.1%. Based on Bloomberg’s consensus (four brokers), the stock has a 12-month target price of S$0.27 and is set to report S$14.1m in net profit in 2013.

Key takeaways from results briefing

·         The group reported 2012 core net profit of S$8.4m (2011:  S$3.3m). This is below Bloomberg’s consensus of S$13.1m. We considered its unrealised mark-to-market forex gains to be part of the core profit as these are operational hedges for its functional currencies. Stripping out forex and exceptional gains, the group would have reported a net loss of S$5.8m against a profit of S$8.8m in 2011.

·         HDD revenue grew 16.6% in 2012 to S$399.8m, largely due to low-base effect as a result of theThailand floods in 2011. However, revenue growth has failed to match up with the excess capacity invested earlier in the year and that led to a depressed EBIT margin of -1.0%, vs 2.0% in 2011. The group is shifting the excess capacity to other business segments but only expects profitability to return in 2H13.  

·         The form plastics business reported a 13.7% yoy growth in sales due to a growth in protective packaging and automotive components segments. Management is looking to achieve double-digit growth for the segment by securing new customers and projects in the automotive and consumer electronics segments.

Our view

·         The HDD sector remains in the doldrums due to falling demand as consumers shift their preference towards smartphones and tablets over PCs. Research firm Gartner reported worldwide PC shipments had declined to 90.3m units in 4Q12 as the sector suffered from a shift in consumer habits and from a weak global economy. Seagate Technology had also provided a lower guidance for 3Q revenue due to muted demand for its HDD for the above reasons.

·         The silvering lining for Broadway is that it has seen some success in diversifying its income stream towards the form plastic segment. The segment now accounts for 28.1% of group revenue with a targeted double-digit growth and a healthy EBIT margin of 5.7%.  

Broadway Industrial Group

UOBKayhian 6 Nov 2012


Valuations

·         Broadway is trading at 10.6x 2011 earnings with a dividend yield of 5.3%. Based on Bloomberg’s consensus estimate (four brokers), the stock has a 12-month target price of S$0.28 and is set to report S$13.1m in earnings in 2012.

What’s new

·         Broadway has two main business segments, namely precision components where the company manufactures HDD Actuator Arm and other semiconductor components, and form plastics for protective packaging.

·         The group’s 3Q12 core net profit swung into the red with S$4.7m losses as compared with S$3.7m and S$3.4m gains in 2Q12 and 3Q11 respectively. This was largely due to weakness in the HDD market that led to a loss in the actuator arm segment. Revenue from this segment fell 30.1% qoq with lower shipments to their customers.

·         According to management, overly bullish guidance from their customers had resulted in Broadway investing heavily in the precision segment. But a sudden downswing in demand caused Broadway to scale down output and operate below break-even capacities. The group only shipped out 32.6m parts in 3Q12 as compared with 43.7m in 2Q12 and optimum capacity of at least 39m parts.

·         The HDD segment may continue to face lower demand and excess inventories going into 4Q12 and Broadway has plans to down scale the Shenzhen plant with an expected US$1m in cost savings per month.

·         On the other hand, the foam plastics segment had registered 5.1% yoy growth in sales from automotive components but profitability was eroded by higher material costs. EBITDA margin shed 0.9ppt yoy to 8.7% in 3Q12.

Our view

·         Broadway’s results reflect the sudden change in sentiment in the HDD industry and with the guidance from Seagate Technology, Broadway’s customer, on its 1Q13 financials, investors should stay out of this sector for the time being.

·         Seagate Technology had reported lower-than-expected 1Q13 earnings and forecasted weaker revenue sequentially, impacted by slowing PC salesin the US and Europe. ASPs on their products are expected to decline 5% qoq with lower gross margins.

·         Furthermore, Broadway had invested S$70.4m of the S$90m committed in capex for 2012 in expectation of the higher HDD components shipments planned previously.