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
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