ElectroTech Investments Limited

Transcription

1 SINGAPORE RESEARCH ElectroTech Investments Limited Plant Visit Note 18 Mar 28 Recommendation Non-Rated ElectroTech Plant Visit Note Bloomberg Code ELEC SP Share Price S$.45 Target Price - Upside Potential - Report Type Plant Visit Note Stock data Sector: Manufacturing Share Cap: 34.7 m shares Market Cap: S$123.4 m Major Shareholders: Analyst Lee Khai Chian (65) khaichian@westcombfinancial.com MICA (P) 213/9/27 A comprehensive outsourcing services provider: We recently visited ElectroTech factories located in Penang, Malaysia. ElectroTech has two main business divisions, namely Mechatronics division and Electronic Manufacturing Services ( EMS ) Division which are represented by Frenken Group and Precico Group respectively. A) Mechatronics Division specializes in the design, manufacture and test complex, high precision electro-mechanical assemblies and precisionengineered systems, commissioned by its clients for their original equipment. Within the division, it is further divided into 3 main segments, namely Semiconductor, Medical and Analytical. Mechatronics Division (Frenken Group) Segment Semiconductor Medical Analytical Customers -ASML -Assembleon -Intervet Segmental VS consolidated Figure 1: Sale (Euro million) Philips Medical -GE -Bayer -Siemens -FEI -Oxford Instruments -PANalytical -Retsch -Leica Microsystems Others Analytical Medical Semi Figure 2: Segmental Growth vs Consolidated Growth (yoy basis) Semi Analytical Medical Total

2 Net Margin Figure 3: Net Margin 14% 12% 1 8% 6% 4% 2% B) EMS Division provides one-stop integrated solutions, including product design and development, engineering, prototyping, tooling design and manufacture, plastics and metal components manufacture, procurement and logistics management, final test and assembly of complete modules or products. EMS division can be further divided into 3 segments which are Keypad, Office Automation ( O.A. ) and Automotive. EMS Division (Precico Group) Segment Keypad O.A. Automative Customers -Shin-Etsu -Neopost -Canon -Xerox Figure 4: -Sanyo -Valeo (RM) H5 2H5 1H6 2H6 1H7 2H7 Others Automative OA Keypad Segmental VS consolidated Figure 5:Segmental Growth vs Consolidated Growth (yoy basis) Keypad H5 2H5 1H6 2H6 1H7 2H7 O.A Automative Total 2

3 Net Margin Figure 6: Net Margin Positives: 1. Stable growth and high profitability for Mechatronic division: Mechatronics division is exposed to diversified industries, cushioning it from being hit by cyclical industry such as Semiconductor. As shown in Figure 2, the aggregated growth rate for the 3 main segments is smoothened out at a more predictable trend. The 3 segments seem to have an opposite boom and bust cycles that enable Mechatronic division to consistently deliver doubledigit growth since. Going forward, growth for medical segment is expected to remain robust, offsetting the declining demand for semiconductor equipments as foundry and testing and assembly companies are expected to cut their capital expenditure in 28. On top of the top line growth, Mechatronics division has been consistently profitable, with net margin hovering at 11%. 2. Strategies meant for long term and sustainable growth: As shown in Figure 5 and 6, EMS division has been undergoing negative and significant drop in net margin for FY7. The tumble in sales and net margin were attributed to the pricing pressure by customers for keypad business and increased competition. Consequently, the management has laid out new strategies to stabilize its growth in revenue and yet retain high profitability. The strategies can be summarized as follow: o Adopting High Mix Low Volume: to increase the profit margin; o Targeting longer product life cycles: to ensure consistent growth; Precico s management is to focus on the vertical expansion which means accumulation of capabilities and know-how instead of horizontal expansion which is mass production. That explains why to date Precico has plants in Penang, but not in other low labour cost countries like China and Vietnam. One new capability the Group recently incorporated is sputtering process that would provide a higher premium to selling price, thus better margin. On top of that, Precico s management plans to cap the capacity for keypad business and transfer part of its keypad s facilities to automotive division which has longer visibility and product life cycle. 3. Encouraging overall performance: Despite disappointing result by EMS division at recent quarters, ElectroTech s overall results are still encouraging owing to its smaller contribution as a percentage of total sales. Albeit significant drop in net margin in EMS division, ElectroTech registered 9% of net margin and 11% of operating margin, threefold of EMS industry average. We estimate mean gross margin, operating margin and net margin for EMS industry to be 7., 3.6% and 3.1% respectively, based on the proxy comprising of a group of EMS companies such as Venture, Plexus, Jabil, Flextronics, Celestica and Benchmark. Figure 8 shows that the contribution from Mechatronics has been increasing over the years, trivializing the negative impact from EMS division. 3

4 Figure 7: ElectroTech's, Net income and ($S million) % 12% 1 8% 6% 4% 2% Net income Figure 8: Contribution of division as a Percentage of Total EMS Mechatronics 4. Attractive dividends: Historically, the management reward shareholders with 3 of its earnings. We believe the company is able to reward shareholders in view of its net cash position with cash and cash equivalents amounting to S$44 million as of 31 Dec 27 while its Capex budget for FY8 is a mere S$14 million (S$9 million for mechatronics division and S$ 5 million for EMS division). Based on the current trading price and FY7 EPS, the dividend yield is as high as 5.6%. Negatives: 1. Uncertain Short-Term Outlook for EMS division: Although Precico s management has set out clear strategies for its long term goals, there is execution risk involved. The ability of management to increase its net margin and more stable growth is yet to be proven. We view that immediate positive result from implementing new strategies is unlikely to happen soon. Nonetheless, we believe the far-sighted management would be able to weather through its short term uncertainties. Valuation With the cash holding of S$44 million and market capitalization of S$123 million, ElectroTech is currently valued at S$79 million excluding cash. Based on the FY8 earnings, its historical PE (ex-cash) is as low as 3.4 times, which we believe is well below the industry s multiples. On top of that, we are optimistic towards its mechatronics division while remain positive about its long term strategies for EMS division. 4

5 Disclosure Westcomb Securities Pte Ltd is a wholly-owned subsidiary of Westcomb Financial Group Limited ( WFG ). WFG and its related corporations (including Westcomb Securities Pte Ltd) (collectively the Westcomb Group ) are principally engaged in the provision of a wide range of capital market advisory and other related services. Each member of the Westcomb Group together with their respective directors and employees may also act as a market maker, or have taken or take positions, or effect transactions in the securities covered or recommended in this Report and may also perform or seek to perform broking and other investment or securities-related services for the Company. For purposes of Section 36 of the Financial Advisers Act (Chapter 11) ( FAA ), as at the date of this Report (being the date of publication of this Report):- (a) Westcomb Securities, its associated persons and its connected persons do not have an interest in the securities covered or recommended in this Report; and (b) The research analyst of Westcomb Securities who has prepared this Report and his associated persons and connected persons do not have an interest in the securities covered or recommended in this Report. The terms associated persons and connected persons have the meanings ascribed thereto in and as defined in Sections 36(3), 2(1) and 3 of the FAA. Westcomb Securities Pte Ltd Rating System Buy Trading Buy Hold Trading Sell Sell Disclaimer : >15% upside over the next 12 months : + 1 to + 15% range over the next 3 months : +/- 15% range over the next 12 months : - 1 to - 15% range over the next 3 months : >15% downside over the next 12 months This Report is based on information obtained from sources which Westcomb Securities Pte Ltd believes to be reliable and correct at the time of publication of this Report. Whilst Westcomb Securities Pte Ltd has taken all reasonable care to ensure that such information is correctly reproduced in the preparation of this Report, no guarantee is given as to the adequacy, accuracy, completeness, reliability or fairness of such information. Any opinion, estimate or recommendation in this Report is subject to change without notice. This Report is not, and should not be construed as, an offer or a solicitation of an offer to buy or sell any securities covered or recommended in this Report. This Report may not be published, circulated, reproduced or distributed in whole or in part to any other person without the written consent of Westcomb Securities Pte Ltd. This Report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution or use would be contrary to applicable law or regulations. This Report and the recommendations (if any) therein: (i) is intended for general information and circulation only, and does not purport to contain all the information that a prospective recipient of this Report may require to make an investment decision on the securities covered or recommended in this Report; (ii) have not taken into account, the specific investment objectives, financial situation and particular needs of any specific recipient of this Report; and (iii) should not be taken in substitution of the exercise of judgment by any recipient of this Report, who should instead consult their own professional and financial advisers as to the legal, business, financial, tax and other aspects regarding the suitability of the securities covered or recommended in this Report for investment having regard to the specific investment objectives, financial situation or particular needs of such recipient, before making any investment decision in relation to such securities. Consequently, Westcomb Securities Pte Ltd does not assume or accept any liability whatsoever for any direct or consequential loss occasioned to any recipient of this Report arising from any use of this Report or otherwise arising in connection with this Report. Westcomb Securities Pte Ltd (Reg. No M) A member of Singapore Exchange Securities Trading Limited 5 Shenton Way #9-8 UIC Building Singapore 6888 Tel : , Fax : Goh Mou Lih Head of Research 5