Amtek

UOBKayhian on 16 Jan 2014

We initiate coverage on Amtek with a BUY recommendation and target price of S$0.63,
representing a 22.3% upside. Since its re-listing at S$1.30 in 2011, Amtek has lost
more than 60% of its market cap. Trading in a tight range of S$0.45-S$0.49 for the last
6 months, stock prices appear to show signs of bottoming which coincides with the
earnings recovery expected in FY14. Amidst positive signs of a global economic
recovery, Amtek could be a proxy play as it serves cyclical sectors such as automobiles
and consumer electronics. For 1QFY14, earnings showed strong signs of recovery as
net profit grew 20%, underpinned by record tooling sales in FY13. At its current price,
valuation remains undemanding at 8.3x FY14F PE vs its peers’ average of 13.3x, with
prices well supported by an attractive dividend yield of 6.4%.

INVESTMENT HIGHLIGHTS

• One-stop provider for end-to-end manufacturing solutions. Amtek is involved in its customers’ supply chain from design and product development to the assembly of the final product. As such, Amtek is able to enjoy better margins and cross-sell other services to its customers, creating a more lasting relationship. As at FY13, 29 of Amtek’s top 30 customers have been with the company for more than 5 years.
• Strong earnings recovery in FY14. After two consecutive years of declining profitability, Amtek is coming off a low base year with a strong earnings recovery. Profitability for 1QFY14 jumped more than 20%, with an increase in sales for most of its business segments. With record tooling sales in FY13 and a recovery in the global economy, we expect Amtek’s earnings to grow in FY14.
• Margin expansion from effective cost control. To curb rising labour costs, Amtek has been increasing operational efficiency through increased automation and operation consolidation. As a result, total wage cost remained flat yoy, despite rising wages across Asia. Profitability has also improved since 4QFY13 as margin expanded from the sleeker operations.
• Attractive yield underpinned by strong free cash flow. Despite a 20% drop in earnings in FY13, Amtek still paid out 53.9% of its earnings with a DPS of S$0.033, which translates to an attractive yield of 6.4%, as compared with the FSSTI’s average dividend yield of 3.3% The company’s dividend payout ability is also underpinned by its strong cash flow generation. Notwithstanding FY13 (where Amtek underwent a significant automation program), free cash flow yield has beenmore than 20% since FY11.
• Undemanding valuation. Trading in a tight range of S$0.45-0.49 for the past six months, Amtek is showing signs of bottoming, which coincides with its earnings recovery in FY14. Backed by a solid balance sheet (net debt/asset: 6%), current valuation at 8.3x FY14F PE is undemanding when compared to its peers’ average of 13.3x. Prices are also well supported with an attractive 6.4% dividend yield.