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%.