Armstrong

CIMB on 29 Feb 2012


ARMSTRONG'S recovery has been faster than expected due to contingency plans in place. Management gave the assurance that Armstrong will not be moving out of Thailand. Separately, it will transfer part of its Singapore operations to two newly-acquired factories in Johor Bahru. This will help cut costs and save on the high levies on foreign workers in Singapore.



We walked away more confident in its recovery in 2012, especially H2 FY2012 from a low base. We believe our FY2012-14 forecasts are slightly more optimistic than the company's internal goals.
We remain Neutral as we believe the bulk of its immediate recovery has been priced in. The market may also be disappointed by the steep cut in its final dividend.


Update on Thailand floods: Insurance claims have been expedited, contributing to the surprise FY2011 net profit of $8.1 million. Claims for two out of its three plants have been settled. Production partially resumed on Jan 16 and Feb 9 at its two plants which have been totally cleaned up. Armstrong's plants were one of the fastest to be restored; watermarks could still be seen on its neighbours' walls.


Its Thai operations accounted for about 25 per cent of group operations and the flooded factories accounted for about 26 per cent of all Thai production, although direct damage was deemed minimal. The total insurance claim is $7.13 million, with $4.7 million already confirmed before the finalisation of its audit.
Recovery was swift: Recovery from the floods was faster than expected as management was quick in transferring production from Thailand to its other plants, and swift to restore and repair damaged plants.


Armstrong's top 10 customers were harder hit by the floods but their recovery has also been faster than expected. As at Jan 12, sales to its top 10 customers recovered to 90.1 per cent of pre-flood levels in Q3 FY2011. In fact, sales to Seagate had returned to 100 per cent while sales to Western Digital had recovered to 60 per cent. Western Digital is moving out about 20 per cent of its total production to Malaysia (bringing its total production there to 60 per cent). In addition, it will be rebuilding its factory on a 1.7m-high platform, with the clean room on the second floor.


The Industrial Park Authority also wants to build a 6m-tall, 77km wall around the industrial park, but might raise rentals as a result. While it says the wall will be built by Aug 12, management is sceptical. In addition, the Thai government will give seven years of tax incentives to affected companies with a minimum reinvestment of 10 million baht (S$411,800) to stem the outflow of companies.


Acquisition of new factories in Johor Bahru: Armstrong has acquired two new factories in Johor Bahru, Malaysia. The size of its current factory is about 8,000 square feet while the new factories are about 18,000 sf. The factories will house part of the operations to be transferred from Singapore, to save on foreign-worker levies.


Managing risks and costs: Management does not think the US dollar will weaken much further but if it does, it may raise prices to customers. As for rising labour costs in China, management will try to raise the productivity of its Chinese workers to match the increase in costs.
NEUTRAL

Armstrong Industrial Corporation

UOBKayhian on 1 Mar 2012

Investment highlights

• Upgrade to HOLD. Armstrong has reported better-than-expected results for FY11 despite muddling through the Japan tsunami and the Thailand flood last year. Our target price of S$0.31 is based on 5-year historical average PE of 9.0x on our 2012F EPS of 3.4 S cents.
• We were caught off-guard when the share price escalated 26% since our last update report in December although Armstrong had issued two negative profit-guidance announcements within this period.

Financial highlights

• Armstrong reported a 67.3% decline in net profit of S$8.1m as compared with 2010’s S$24.9m. This is due to the business disruption arising from the Japanese tsunami and Thailand flood that resulted in a 5.0% yoy contraction of revenue to S$214m.
• On segmental results, hard disk drive (HDD) sales slumped 10.3% yoy to S$47.9m as the flood inThailand impacted the group’s key HDD customers. However, recovery is on-track with production recovering to 91.1% of pre-flood capacity, and is expected to reach full recovery by the end of 2Q12.The automobile segment grew 8.0% yoy to S$75.4m, driven by stronger demand in China. The group targets to grow the automobile segment by 10-15% in 2012, driven by new accounts and introduction of higher value and higher margin products to customers. Armstrong had secured new contracts with two key European and two local original equipment manufacturers (OEM) plus five key tiers customers servicing major OEMs in 2011.
• Armstrong had recognised S$4.7m of the total S$7.13m insurance claims in 4Q11 with the remaining S$2.4m to be received in 1Q12. This managed to offset some of the impairment charges recorded due to the natural disaster in Thailand. To limit damages from any future floods, Armstrong is acquiring a new factory south of Bangkok that is located on elevated ground with total capex budgeted at S$20m, funded by insurance claims, loans and operating cashflow.
• Armstrong has declared a dividend of 0.6 S cents/share for 2011 and targets to pay out at least 30-40% of earnings as dividends.

Earnings revision

• We increase our net profit forecasts for 2012 to S$17.1m from S$11.4m previously driven by faster-than-expected HDD sector recovery and stronger growth in the automobile space, particularly inChina. We expect Armstrong to declare dividends of 1.2 S cents, providing investors an additional yield of 3.9% as of last traded price. We also introduce our 2014F earnings and forecast the group’s net profit to grow at a CAGR of 9.0% from 2012-14.