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.