Armstrong Industrial Corporation

UOBKayhian on 1 Mar 2012

Investment highlights

• Upgrade to HOLD. Armstrong has reported better-than-expected results for FY11 despite muddling through the Japan tsunami and the Thailand flood last year. Our target price of S$0.31 is based on 5-year historical average PE of 9.0x on our 2012F EPS of 3.4 S cents.
• We were caught off-guard when the share price escalated 26% since our last update report in December although Armstrong had issued two negative profit-guidance announcements within this period.

Financial highlights

• Armstrong reported a 67.3% decline in net profit of S$8.1m as compared with 2010’s S$24.9m. This is due to the business disruption arising from the Japanese tsunami and Thailand flood that resulted in a 5.0% yoy contraction of revenue to S$214m.
• On segmental results, hard disk drive (HDD) sales slumped 10.3% yoy to S$47.9m as the flood inThailand impacted the group’s key HDD customers. However, recovery is on-track with production recovering to 91.1% of pre-flood capacity, and is expected to reach full recovery by the end of 2Q12.The automobile segment grew 8.0% yoy to S$75.4m, driven by stronger demand in China. The group targets to grow the automobile segment by 10-15% in 2012, driven by new accounts and introduction of higher value and higher margin products to customers. Armstrong had secured new contracts with two key European and two local original equipment manufacturers (OEM) plus five key tiers customers servicing major OEMs in 2011.
• Armstrong had recognised S$4.7m of the total S$7.13m insurance claims in 4Q11 with the remaining S$2.4m to be received in 1Q12. This managed to offset some of the impairment charges recorded due to the natural disaster in Thailand. To limit damages from any future floods, Armstrong is acquiring a new factory south of Bangkok that is located on elevated ground with total capex budgeted at S$20m, funded by insurance claims, loans and operating cashflow.
• Armstrong has declared a dividend of 0.6 S cents/share for 2011 and targets to pay out at least 30-40% of earnings as dividends.

Earnings revision

• We increase our net profit forecasts for 2012 to S$17.1m from S$11.4m previously driven by faster-than-expected HDD sector recovery and stronger growth in the automobile space, particularly inChina. We expect Armstrong to declare dividends of 1.2 S cents, providing investors an additional yield of 3.9% as of last traded price. We also introduce our 2014F earnings and forecast the group’s net profit to grow at a CAGR of 9.0% from 2012-14.