Armstrong
SMC Research
Singapore Equity Explorer
Armstrong |
Bloomberg: ARMS SP
Reuters: ARMS.SI
DBS Group Research . Equity
2 Feb 2012
NOT RATED S$0.285 STI : 2,904.76
Set for post-flood rebound
Return *: 1 Risk: Moderate Potential Target * : 12-Month S$ 0.40 (38% upside)
•
Leading foam & rubber components supplier with >30 years track record
•
FY12 PATMI to double as electronics/HDD recovers post flood, and auto grows firmly
Analyst TAN Ai Teng +65 6398 7967 [email protected]
•
We value Armstrong at S$0.40 per share based on 1.6x FY12 P/B.
The Business Price Relative S$
Leading foam and rubber components manufacturer. Armstrong specializes in components used in Noise, Vibration and Heat (“NVH”) Management for the automotive and electronics industries.
R e la t iv e In d e x
0 .5
221
0 .5
201
0 .4
181
0 .4
161
0 .3
141
0 .3
121
0 .2
101 81
0 .2
61
0 .1 F e b -0 8
F e b -0 9
A rm stro n g (L H S )
F e b -1 0
F e b -1 1
F e b -1 2
R e la t iv e S T I IN D E X ( R H S )
Forecasts and Valuation FY Dec (S$ m)
Turnover EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (S cts) EPS Pre Ex. (S cts) EPS Gth (%) EPS Gth Pre Ex (%) Diluted EPS (S cts) Net DPS (S cts) BV Per Share (S cts) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Consensus EPS (S cts): Other Broker Recs:
2010A
2011F
2012F
2013F
225 39 33 25 25 4.8 4.8 77 77 4.8 3.9 19.5 5.9 5.9 8.9 3.7 13.6 1.5 CASH 25.6
212 18 11 7 7 1.3 1.3 (72) (72) 1.3 0.2 20.9 21.3 21.3 nm 9.4 0.8 1.4 0.1 6.6
230 24 18 13 13 2.6 2.6 94 94 2.6 0.5 23.1 11.0 11.0 9.9 6.6 1.6 1.2 0.0 11.8
250 21 21 15 15 3.0 3.0 16 16 3.0 0.5 25.5 9.4 9.4 15.0 7.7 1.9 1.1 0.0 12.5
1.3 B: 0
3.8 S: 2
3.7 H: 2
ICB Industry : Industrials ICB Sector: Industrial Engineering Principal Business: Manufactures and sells precision die-cut foam and rubber molded components for a range of applications, including insulating, dampening, cushioning, and sealing.
Earnings to almost double post flood. Fore mostly, FY11 earnings were majorly dragged down by S$5-6m of impairment charges due to the flood in Thailand. Post flood, earnings would rebound in the absence of these one-offs and the impending recovery of HDD late in 1Q12. Automotive, which contributes 34% of sales, is expected to grow above industry as Armstrong plans to leverage on market share gain of existing customers in China and supply higher value complex components. All in, we estimated net earnings could almost double in FY12. We value Armstrong at S$0.40 per share, with 38% upside from current price based on 1.6x P/B on FY12F BVPS of S$0.21. Earning recovery may be slow in 1Q12 but growth would gain speed from 2Q12 onwards. Key risk to our view is high volatility of USD, which has led to some S$6m MTM unrealized losses in FY11. These losses could be written back if USD stays firm. Current low valuations may rekindle M&A talks? Last year, Armstrong was reportedly approached and in close negotiations with an interested party when stock was valued at 2.2x PB. Now that the Japanese earthquake and floods in Thailand have depressed valuation to 1.2x PB, it would not surprise us if M&A talks resurfaced again.
At A Glance Issued Capital (m shrs) Mkt. Cap (S$m/US$m) Major Shareholders Ong Peng Koon Gibert (%) Chow Goon Chau Patricia (%) Free Float (%) Avg. Daily Vol.(‘000)
509 145 / 116 39.1 5.6 55.3 1,444
Source of all data: Company, DBS Vickers, Bloomberg
*This Equity Explorer report represents a preliminary assessment of the subject company, and does not represent initiation into DBSV’s coverage universe. As such DBSV does not commit to regular updates on an ongoing basis. The rating system is distinct from stocks in our regular coverage universe and is explained further on the back page of this report. www.dbsvickers.com
Refer to important disclosures at the end of this report sa: YM
Equity Explorer Armstrong REVENUE DRIVERS Automotive segment is main revenue contributor and key growth
Segmental Revenue Breakdown – 9M11
star. As of 9M11, revenue from the automotive segment grew 7.3%
Office Automation 10%
y-o-y, replacing consumer electronics/telecom as the largest revenue
Consumer Electronics / Telecom 31%
contributor, to account for 34% (+3.1 ppt y-o-y) of group revenues. It is also a key growth segment for Armstrong, expanding at15-20% each year. Going by this rate, management targets for the segment to contribute 50% of group revenues by FY15. Auto also earned
Data Storage 24%
relatively higher net margin of about 15-20%, compared to HDD, which made c. 5% net margin. Data Storage is a cash cow providing steady returns but susceptible
Others 1%
to USD volatility. Data storage is Armstrong’s third largest revenue
Automotive 34%
contributor, and has, since FY08, enjoyed average operating profit margins of c.18% (vs. c.8% from consumer electronics, the second
Geographical Revenue Breakdown – 9M11
largest revenue segment). While proven dependable over the years, weak USD against Asian currencies has eroded revenue as seen in
Thailand 26%
the past year. Singapore 29%
COST STRUCTURE Indonesia 7%
Fairly stable fixed and variable operating expenses. Distribution expenses, which are usually variable, account for about 2-4% of
Malaysia 6%
revenue, while administrative expenses, which are usually fixed, typically account for about 9-12%. Quarterly fluctuations are mainly
China 30%
attributable to USD volatility impacts on mark-to-market forward forex contracts.
Fixed and variable opex are fairly stable
Slight margin improvements expected. Armstrong’s gross margins
14
have been declining on combined effects of a weak USD on USD-
10
labour costs. While sticky cost-inflation should persist, Eurozone USD going forward, and should translate to margin improvements.
Volatility impacts from MTM forex contracts
12
denominated income receipts, higher raw material costs and higher weakness and China’s growth slowdown bode well for a stronger
Vietnam 2%
8
(%)
6 4
KEY OPERATING ASSETS
2
State-of-the-art manufacturing facilities and offices in key
0
geographical markets. Headquartered in Singapore, Armstrong has
3Q09
offices and factories across its geographical markets of China, Thailand, Malaysia, Indonesia and Vietnam. Amongst these facilities,
4Q09
1Q10
Distribution Costs
2Q10
3Q10
4Q10
1Q11
Administration Expenses
2Q11
3Q11
Other expenses
Gross margins can sustain or improve on firm USD
Armstrong has in-house laboratories to undertake research, design 60
and engineering works, performing analytical as well as material
30
28.7
tests to develop new innovative products and sustain quality.
56
28
28.0 27.4
27.4 26.4
52
26.1
26
(m) 48
24
23.7 22.2
44
22
22.0 40
20 3Q09
4Q09
1Q10
2Q10 Sales
Source: Company, DBS Vickers
Page 2
3Q10
4Q10
1Q11
Gross Margins (%)
2Q11
3Q11
(%)
Equity Explorer Armstrong
GROWTH PROSPECTS Armstrong can expand market share and cement its leading position
HDD Market Share: 3Q11 & Post-Consolidation estimates Hitachi GST 18%
amid HDD consolidation. Armstrong is the largest HDD crash top
Toshiba 13%
supplier, commanding more than 40% of global market share.
Seagate 39%
Samsung 7%
Besides crash top, the company supplies six other components to three of the largest HDD players: WD, Seagate, and Hitachi GST.
WD 50%
Post-consolidation, Armstrong’s HDD customers are estimated to
Seagate 29%
account for c.89% of total market share (+9 ppt pre-consolidation)
WD 33%
and the slowdown of the industry growth would cement
Toshiba 11%
Armstrong’s HDD segment market share. Leveraging on existing customers and higher-end components to drive automotive segment growth. Key customers Volkswagen (“VW”) and PSA Peugeot Citroën (“PSA”) collectively hold c.19% (+8 ppt y-o-y) of China market share, and have further growth plans in China. VW, in particular, saw FY11 sales grow +17.7% y-o-y (vs.
Source: Trendfocus, iSuppli, DBS Vickers Slowdown in Global HDD Shipment Growth 1,000
18 16.8 802.0
800
per 1,000 people representing a fraction of mature markets, where rates range from 300-800 per 1,000 people. Armstrong is also
651.3 600
686.1 12
557.5 8.3
(m)
9 (%)
7.9
400
targeting above market growth of 7% for this segment by shifting their product focus towards larger, higher-value components.
15
743.1
market +5.2% y-o-y). Although growth levels have tapered-down, China remains an attractive market, with car penetration rates of 60
882.3
850.3
200
6
6.0
5.3
3.8
3.5
3
MANAGEMENT & STRATEGY 0
0
Experience not just in depth, but also in breadth. Armstrong is
2009
2010
headed by founder and CEO Ong Peng Koon who has >30 years of industry experience. Other key personnel are also vastly experienced in diverse fields – banking, information systems, manufacturing, etc. Such diversity in experience could be critical for the company as it grows its business regionally. Growth through partnerships. Management has identified China, Thailand and more recently, India as growth markets for its NVH products. Management aims to grow by (i) leveraging on existing
customer bases and local knowledge, as it has with Indica Chemical
2012F
HDD Shipment
2013F
2014F
YoY Growth
2015F
Growth slowdown
Source: Gartner, DBS Vickers China: Annual Domestic Automotive Sales (FY06-FY15F) 30
50
25
23.4
20
18.0
19.3
20.6
25.0 40
21.9
30 (m) 15
13.6
customers looking to grow in these areas, and growing in tandem with them, and (ii) partnering domestic enterprises with ready
2011E
10
8.8
(%) 20
9.4
7.2 10
5
Industries in India and Universal Forme in Australia. 0
Focus on productivity and high-value products. To sustain its competitive edge, the company has continuously developed niche products, and relinquished businesses with diminishing margins.
0 2006
2007
2008
2009
2010 China
2011
2012F
2013F
2014F
2015F
YoY growth
Source: CEIC, CAAM
Armstrong also engages in productivity management, a result of which has seen productivity levels in terms of space, productive assets and manpower utilisation rates increase by 11-25% y-o-y. Management’s interest aligned with shareholders. Key stakeholders control about 46% of the company, of which CEO and Deputy CEO control about 40% of total shares. As of end FY10, variable components account for c.85% of CEO and Deputy CEO remuneration, representing an alignment of management and shareholders’ interests in our view.
Page 3
Equity Explorer Armstrong Key Management Team
Manager
Current Appointment
Experience
Mr Ong Peng Koon Gilbert
CEO
Founder of the Company. Mr Ong has >30 years of industry experience, and is a member of the Company’s Nominating Committee, holding various directorship in the Group’s subsidiaries.
Mr Koh Gim Hoe Steven
Deputy CEO
Mr Koh joined the Company in 1998 and was appointed to the board in 2000. Prior to this, Mr Koh has held several management positions in major banks and was the Chairman of the Singapore Club in South Korea. He holds various Diplomas in Banking, Accountancy and Management and various directorship in the Group’s subsidiaries.
Ms Sin Wan Lin
CFO
Ms Sin joined the Company in September 2011. She was most recently a Senior Audit Manager with Ernst & Young LLP.
Mr Cheng Song Chang Benny
Managing Director
Mr Cheng has >21 years of Manufacturing Information & Systems experience, having served 10 years in American MNCs like Digital Equipment and AT&T prior to joining the company in 1996 as a Corp MIS Manager. Mr Cheng has since risen through the ranks and was promoted in 2009 to be Managing Director. He holds a BSc in Computer Science from University of Houston, Texas.
Mr Wee Kim Teck Glen
President - Thailand operations
Mr Wee joined Armstrong Rubber & Chemical Products Co Ltd in 1999 and is currently the President of their Thailand operations. Mr Wee has >23 years experience in the manufacturing field in the various roles of manufacturing supervision, production management and the last 15 years in operations/business development management.
Source: Company, DBS Vickers
Page 4
Equity Explorer Armstrong
Segmental Breakdown FY Dec
2008A
2009A
2010A
2011F
2012F
2013F
46 22 66 46 2 182
51 18 57 48 1 174
53 23 77 70 2 225
50 21 66 72 2 212
53 23 71 82 3 230
56 24 75 92 3 250
FY Dec
2008A
2009A
2010A
2011F
2012F
2013F
Revenue Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net Profit before Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x)
182 (133) 49 (31) 18 0 0 0 0 18 (4) (2) 0 13 13 23
174 (130) 44 (25) 19 0 0 0 0 19 (4) (1) 0 14 14 24
225 (163) 62 (28) 34 0 0 0 0 33 (7) (2) 0 25 25 39
212 (164) 48 (36) 12 0 0 (1) 0 11 (4) (1) 0 7 7 18
230 (175) 55 (37) 18 0 0 0 0 18 (4) (1) 0 13 13 24
250 (189) 61 (40) 21 0 0 0 0 21 (4) (1) 0 15 15 21
(0.3) (24.9) (30.7) (25.2)
(4.8) 5.4 3.2 7.1
29.8 59.4 76.2 77.1
(6.1) (54.9) (64.2) (72.6)
8.8 37.9 52.6 94.4
8.7 (13.0) 14.9 16.5
27.0 10.1 7.2 16.0 9.8 15.1 38.1 162.1
25.4 11.0 8.1 15.8 9.8 13.8 56.9 77.8
27.5 14.9 11.0 25.6 15.9 22.4 80.6 94.7
22.5 5.7 3.2 6.6 4.2 6.5 17.7 20.5
24.0 8.0 5.8 11.8 7.8 10.6 17.7 52.9
24.5 8.4 6.2 12.5 8.3 11.2 17.7 60.8
Revenues (S$ m) Data Storage Office Automation Consumer Electronics / Automotive Others Total
Margins Trend
Income Statement (S$ m)
15.0% 13.0% 11.0% 9.0% 7.0% 5.0% 3.0% 2009A
2010A
Operating Margin %
2011F
2012F
2013F
Net Income Margin %
Strong earnings rebound due to recovery of business post Thai flood and absence of S$5-6m of impairment charges
Source: Company, DBS Vickers
Page 5
Equity Explorer Armstrong Balance Sheet (S$ m)
Asset Breakdown (2011) 2008A
2009A
2010A
2011F
2012F
2013F
Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets
42 0 2 27 28 35 5 138
40 0 1 30 27 48 4 149
40 0 1 26 37 55 5 165
40 1 1 6 37 74 5 164
39 1 1 10 39 81 5 177
45 1 1 10 44 88 5 194
ST Debt Other Current Liab LT Debt Other LT Liabilities Shareholder’s Equity Minority Interests Total Cap. & Liab.
8 35 2 0 85 8 138
11 36 2 0 94 6 149
15 39 2 0 101 8 165
15 32 2 0 106 9 164
15 33 2 0 117 10 177
15 36 2 0 130 11 194
33 17 80.0 53.6 67.9 1.4 2.2 1.4 CASH (0.2) 119.5 NA
42 17 87.4 61.9 79.9 1.2 2.3 1.7 CASH (0.2) 29.6 NA
57 10 83.5 56.0 73.0 1.4 2.3 1.5 CASH (0.1) 37.8 NA
84 (11) 111.8 49.6 84.7 1.3 2.6 1.7 0.1 0.0 31.1 NA
92 (6) 122.8 39.7 82.1 1.4 2.8 1.9 0.0 0.1 33.7 NA
101 (7) 122.9 38.8 80.3 1.4 2.9 1.9 0.0 0.1 33.7 NA
2008A
2009A
2010A
2011F
2012F
2013F
18 5 (4) 0 (4) 4 20 (12) 0 (1) 0 0 (12) (8) 2 0 (1) (7) 0 0 4.5 1.5
19 5 (4) 0 (9) (3) 9 (4) 1 (3) 0 0 (6) (5) 4 0 0 (1) 0 2 3.4 1.0
33 5 (6) 0 (15) (1) 16 (6) 0 0 0 0 (6) (18) 4 1 0 (14) 0 (4) 6.1 2.0
11 7 (4) 0 (26) 0 (12) (5) 0 (1) 0 0 (6) (1) 0 0 0 (1) 0 (20) 2.8 (3.4)
18 8 (4) 0 (8) 0 15 (6) 0 0 0 0 (6) (2) 0 0 0 (2) 0 7 4.4 1.8
21 2 (4) 0 (9) 0 10 (6) 0 0 0 0 (6) (3) 0 0 0 (3) 0 1 3.8 0.8
FY Dec
Non-Cash Wkg. Capital Net Cash/(Debt) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X)
Cash Flow Statement (S$ m) FY Dec
Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Currency Adjustments Chg in Cash Opg CFPS (S cts) Free CFPS (S cts)
Source: Company, DBS Vickers
Page 6
Net Fixed Assets 25.2%
Debtors 47.1%
Associates'/J Vs 0.8%
Bank, Cash and Liquid Assets 3.5%
Inventory 23.4%
We believe management intends to control net gearing below 0.2
Capital Expenditure 7 6 5 4 3 2 1 0 2009A
2010A
2011F
2012F
Capital Expenditure (-)
2013F
Equity Explorer Armstrong
Quarterly / Interim Income Statement (S$ m)
Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%)
Revenue Trend 56 (43) 13 (8) 6 0 0 0 0 6 (1) 0 4 4 7
53 (41) 12 (8) 4 0 0 0 0 4 (1) 0 2 2 5
56 (44) 12 (10) 2 0 0 0 0 2 (1) 0 0 0 3
(0.4) 0.9 0.9 (0.4)
4.6 (23.5) (26.7) (35.6)
(3.1) 20.0 23.6 35.9
0.2 (28.1) (32.5) (35.1)
(6.4) (28.7) (35.4) (47.9)
6.3 (35.8) (49.2) (94.2)
28.7 16.7 12.7
26.1 11.7 7.8
27.4 14.9 11.0
23.7 10.1 7.1
22.2 6.9 4.0
22.0 3.3 0.2
25% 20%
50
15% 40 10% 30 5% 20
0%
10
-5%
0
-10%
Revenue
3Q2011
56 (41) 15 (7) 8 0 0 0 0 8 (2) 0 6 6 10
2Q2011
58 (43) 15 (8) 7 0 0 0 0 7 (2) (1) 5 5 8
30%
60
1Q2011
55 (40) 16 (7) 9 0 0 0 0 9 (2) 0 7 7 11
70
4Q2010
3Q2011
3Q2010
2Q2011
2Q2010
1Q2011
1Q2010
4Q2010
4Q2009
Revenue Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Net Profit Net profit bef Except. EBITDA
3Q2010
3Q2009
2Q2010
2Q2009
FY Dec
Revenue Growth % (QoQ)
Includes S$5.7m of MTM losses
Source: Company, DBS Vickers
VALUATIONS Currently slightly below historical average, deserves to re-rate up to
Historical 12 month forward PB ratio (x)
mean on improving outlook. The stock currently trades at 1.26x P/B,
3.5
which is slightly below the past 5 years’ historical P/B of 1.6x. We
3.0
believe a re-rating to historical mean valuation on FY12F BVPS is fair, now that the worst is over and outlook is improving gradually. Based on 1.6x P/B, TP works out to S$0.40 per share, which translates to an upside of 38% from the current price. In the event
+2 SD
2.5
+1 SD
2.0 1.5
Avg
believe the counter could potentially re-rate upwards and beyond
1.0
-1 SD
+0.5 SD levels, or S$0.44 and above, as was the case in FY10.
0.5
-2 SD
that sentiment continues to power ahead of fundamentals, we
0.0
Risk Assessment: Moderate Category Earnings Financials Shareholdings Overall
Risk Rating 1 (Low) - 3 (High) 2 1 1
2005
Wgt
Wgtd Score
40% 20% 40%
0.8 0.2 0.4 1.4
Relatively low share price volatility. Armstrong engages in sharebuyback and has historically averaged dividend yields of c.4-5%. For FY11, we expect dividend payout to moderate in view of weaker result affected by the Japan earthquake in March and Thai floods in
2006
2007
2008
2009
2010
2011
2012
HDD Peers’ Comparisons Company
Price (local currcy)
Mkt Cap (US$m)
Regional HDD component supplier Amtek 0.67 292 Armstrong 0.285 116 Broadway 0.335 112 0.19 47 Cheung Woh Average
P/E Last Yr
Fwd Yr 1
Fwd Yr 2
6.5 11.5 nm 4.9 7.6
6.4 21.9 15.2 5.6 12.3
4.9 10.2 5.5 3.5 6.0
P/B
EV/ EBITDA
ROE (%)
1.9 1.5 0.6 0.6 1.2
5.7 4.0 1.9 4.0 4.3
34.4 25.6 21.4 19.3 25.2
Source: DBS Vickers, Bloomberg
Oct. Otherwise, given relatively strong balance sheet, the stock is unlikely to demonstrate any significant price volatility as compared to its peers.
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Equity Explorer Armstrong
DBSV Equity Explorer return ratings reflect return expectations based on an assumed earnings profile and valuation parameters: 1
(>20% potential returns over the next 12 months)
2
(0 - 20% potential returns over the next 12 months)
3
(negative potential return over the next 12 months)
The risk assessment is qualitative in nature and is rated as either high, low or moderate risk. (see section on risk assessment) Note that these assessments are based on a preliminary review of factors deemed salient at the time of publication. DBSV does not commit to ongoing coverage and updated assessments of stocks covered under the Equity Explorer product suite. Such updates will only be made upon official initiation of regular coverage of the stock. DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson (www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg (DBSR GO). For access, please contact your DBSV salesperson. GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers Research (Singapore) Pte Ltd ("DBSVR"), a direct wholly-owned subsidiary of DBS Vickers Securities (Singapore) Pte Ltd ("DBSVS") and an indirect wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). This report is intended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVR. It is being distributed in the United States by DBSV US, which accepts responsibility for its contents. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBS Vickers Securities (USA) Inc (“DBSVUSA”) directly and not its affiliate. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBSVR, DBSVS, and/or DBSVH) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. DBSVR accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a wholly-owned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. DBSVR, DBSVS, DBS Bank Ltd and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by DBSVR, DBSVS and/or DBSVH (and/or any persons associated with the aforesaid entities), that: (a) (b)
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Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 2 Feb 2012, the analyst and his / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities, directorships and trustee positions).
Page 8
Equity Explorer Armstrong
COMPANY-SPECIFIC / REGULATORY DISCLOSURES DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the company mentioned as 1. of 31-Jan-2012 2.
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Page 9
Singapore Equity Explorer
Armstrong |
Bloomberg: ARMS SP
Reuters: ARMS.SI
DBS Group Research . Equity
2 Feb 2012
NOT RATED S$0.285 STI : 2,904.76
Set for post-flood rebound
Return *: 1 Risk: Moderate Potential Target * : 12-Month S$ 0.40 (38% upside)
•
Leading foam & rubber components supplier with >30 years track record
•
FY12 PATMI to double as electronics/HDD recovers post flood, and auto grows firmly
Analyst TAN Ai Teng +65 6398 7967 [email protected]
•
We value Armstrong at S$0.40 per share based on 1.6x FY12 P/B.
The Business Price Relative S$
Leading foam and rubber components manufacturer. Armstrong specializes in components used in Noise, Vibration and Heat (“NVH”) Management for the automotive and electronics industries.
R e la t iv e In d e x
0 .5
221
0 .5
201
0 .4
181
0 .4
161
0 .3
141
0 .3
121
0 .2
101 81
0 .2
61
0 .1 F e b -0 8
F e b -0 9
A rm stro n g (L H S )
F e b -1 0
F e b -1 1
F e b -1 2
R e la t iv e S T I IN D E X ( R H S )
Forecasts and Valuation FY Dec (S$ m)
Turnover EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (S cts) EPS Pre Ex. (S cts) EPS Gth (%) EPS Gth Pre Ex (%) Diluted EPS (S cts) Net DPS (S cts) BV Per Share (S cts) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Consensus EPS (S cts): Other Broker Recs:
2010A
2011F
2012F
2013F
225 39 33 25 25 4.8 4.8 77 77 4.8 3.9 19.5 5.9 5.9 8.9 3.7 13.6 1.5 CASH 25.6
212 18 11 7 7 1.3 1.3 (72) (72) 1.3 0.2 20.9 21.3 21.3 nm 9.4 0.8 1.4 0.1 6.6
230 24 18 13 13 2.6 2.6 94 94 2.6 0.5 23.1 11.0 11.0 9.9 6.6 1.6 1.2 0.0 11.8
250 21 21 15 15 3.0 3.0 16 16 3.0 0.5 25.5 9.4 9.4 15.0 7.7 1.9 1.1 0.0 12.5
1.3 B: 0
3.8 S: 2
3.7 H: 2
ICB Industry : Industrials ICB Sector: Industrial Engineering Principal Business: Manufactures and sells precision die-cut foam and rubber molded components for a range of applications, including insulating, dampening, cushioning, and sealing.
Earnings to almost double post flood. Fore mostly, FY11 earnings were majorly dragged down by S$5-6m of impairment charges due to the flood in Thailand. Post flood, earnings would rebound in the absence of these one-offs and the impending recovery of HDD late in 1Q12. Automotive, which contributes 34% of sales, is expected to grow above industry as Armstrong plans to leverage on market share gain of existing customers in China and supply higher value complex components. All in, we estimated net earnings could almost double in FY12. We value Armstrong at S$0.40 per share, with 38% upside from current price based on 1.6x P/B on FY12F BVPS of S$0.21. Earning recovery may be slow in 1Q12 but growth would gain speed from 2Q12 onwards. Key risk to our view is high volatility of USD, which has led to some S$6m MTM unrealized losses in FY11. These losses could be written back if USD stays firm. Current low valuations may rekindle M&A talks? Last year, Armstrong was reportedly approached and in close negotiations with an interested party when stock was valued at 2.2x PB. Now that the Japanese earthquake and floods in Thailand have depressed valuation to 1.2x PB, it would not surprise us if M&A talks resurfaced again.
At A Glance Issued Capital (m shrs) Mkt. Cap (S$m/US$m) Major Shareholders Ong Peng Koon Gibert (%) Chow Goon Chau Patricia (%) Free Float (%) Avg. Daily Vol.(‘000)
509 145 / 116 39.1 5.6 55.3 1,444
Source of all data: Company, DBS Vickers, Bloomberg
*This Equity Explorer report represents a preliminary assessment of the subject company, and does not represent initiation into DBSV’s coverage universe. As such DBSV does not commit to regular updates on an ongoing basis. The rating system is distinct from stocks in our regular coverage universe and is explained further on the back page of this report. www.dbsvickers.com
Refer to important disclosures at the end of this report sa: YM
Equity Explorer Armstrong REVENUE DRIVERS Automotive segment is main revenue contributor and key growth
Segmental Revenue Breakdown – 9M11
star. As of 9M11, revenue from the automotive segment grew 7.3%
Office Automation 10%
y-o-y, replacing consumer electronics/telecom as the largest revenue
Consumer Electronics / Telecom 31%
contributor, to account for 34% (+3.1 ppt y-o-y) of group revenues. It is also a key growth segment for Armstrong, expanding at15-20% each year. Going by this rate, management targets for the segment to contribute 50% of group revenues by FY15. Auto also earned
Data Storage 24%
relatively higher net margin of about 15-20%, compared to HDD, which made c. 5% net margin. Data Storage is a cash cow providing steady returns but susceptible
Others 1%
to USD volatility. Data storage is Armstrong’s third largest revenue
Automotive 34%
contributor, and has, since FY08, enjoyed average operating profit margins of c.18% (vs. c.8% from consumer electronics, the second
Geographical Revenue Breakdown – 9M11
largest revenue segment). While proven dependable over the years, weak USD against Asian currencies has eroded revenue as seen in
Thailand 26%
the past year. Singapore 29%
COST STRUCTURE Indonesia 7%
Fairly stable fixed and variable operating expenses. Distribution expenses, which are usually variable, account for about 2-4% of
Malaysia 6%
revenue, while administrative expenses, which are usually fixed, typically account for about 9-12%. Quarterly fluctuations are mainly
China 30%
attributable to USD volatility impacts on mark-to-market forward forex contracts.
Fixed and variable opex are fairly stable
Slight margin improvements expected. Armstrong’s gross margins
14
have been declining on combined effects of a weak USD on USD-
10
labour costs. While sticky cost-inflation should persist, Eurozone USD going forward, and should translate to margin improvements.
Volatility impacts from MTM forex contracts
12
denominated income receipts, higher raw material costs and higher weakness and China’s growth slowdown bode well for a stronger
Vietnam 2%
8
(%)
6 4
KEY OPERATING ASSETS
2
State-of-the-art manufacturing facilities and offices in key
0
geographical markets. Headquartered in Singapore, Armstrong has
3Q09
offices and factories across its geographical markets of China, Thailand, Malaysia, Indonesia and Vietnam. Amongst these facilities,
4Q09
1Q10
Distribution Costs
2Q10
3Q10
4Q10
1Q11
Administration Expenses
2Q11
3Q11
Other expenses
Gross margins can sustain or improve on firm USD
Armstrong has in-house laboratories to undertake research, design 60
and engineering works, performing analytical as well as material
30
28.7
tests to develop new innovative products and sustain quality.
56
28
28.0 27.4
27.4 26.4
52
26.1
26
(m) 48
24
23.7 22.2
44
22
22.0 40
20 3Q09
4Q09
1Q10
2Q10 Sales
Source: Company, DBS Vickers
Page 2
3Q10
4Q10
1Q11
Gross Margins (%)
2Q11
3Q11
(%)
Equity Explorer Armstrong
GROWTH PROSPECTS Armstrong can expand market share and cement its leading position
HDD Market Share: 3Q11 & Post-Consolidation estimates Hitachi GST 18%
amid HDD consolidation. Armstrong is the largest HDD crash top
Toshiba 13%
supplier, commanding more than 40% of global market share.
Seagate 39%
Samsung 7%
Besides crash top, the company supplies six other components to three of the largest HDD players: WD, Seagate, and Hitachi GST.
WD 50%
Post-consolidation, Armstrong’s HDD customers are estimated to
Seagate 29%
account for c.89% of total market share (+9 ppt pre-consolidation)
WD 33%
and the slowdown of the industry growth would cement
Toshiba 11%
Armstrong’s HDD segment market share. Leveraging on existing customers and higher-end components to drive automotive segment growth. Key customers Volkswagen (“VW”) and PSA Peugeot Citroën (“PSA”) collectively hold c.19% (+8 ppt y-o-y) of China market share, and have further growth plans in China. VW, in particular, saw FY11 sales grow +17.7% y-o-y (vs.
Source: Trendfocus, iSuppli, DBS Vickers Slowdown in Global HDD Shipment Growth 1,000
18 16.8 802.0
800
per 1,000 people representing a fraction of mature markets, where rates range from 300-800 per 1,000 people. Armstrong is also
651.3 600
686.1 12
557.5 8.3
(m)
9 (%)
7.9
400
targeting above market growth of 7% for this segment by shifting their product focus towards larger, higher-value components.
15
743.1
market +5.2% y-o-y). Although growth levels have tapered-down, China remains an attractive market, with car penetration rates of 60
882.3
850.3
200
6
6.0
5.3
3.8
3.5
3
MANAGEMENT & STRATEGY 0
0
Experience not just in depth, but also in breadth. Armstrong is
2009
2010
headed by founder and CEO Ong Peng Koon who has >30 years of industry experience. Other key personnel are also vastly experienced in diverse fields – banking, information systems, manufacturing, etc. Such diversity in experience could be critical for the company as it grows its business regionally. Growth through partnerships. Management has identified China, Thailand and more recently, India as growth markets for its NVH products. Management aims to grow by (i) leveraging on existing
customer bases and local knowledge, as it has with Indica Chemical
2012F
HDD Shipment
2013F
2014F
YoY Growth
2015F
Growth slowdown
Source: Gartner, DBS Vickers China: Annual Domestic Automotive Sales (FY06-FY15F) 30
50
25
23.4
20
18.0
19.3
20.6
25.0 40
21.9
30 (m) 15
13.6
customers looking to grow in these areas, and growing in tandem with them, and (ii) partnering domestic enterprises with ready
2011E
10
8.8
(%) 20
9.4
7.2 10
5
Industries in India and Universal Forme in Australia. 0
Focus on productivity and high-value products. To sustain its competitive edge, the company has continuously developed niche products, and relinquished businesses with diminishing margins.
0 2006
2007
2008
2009
2010 China
2011
2012F
2013F
2014F
2015F
YoY growth
Source: CEIC, CAAM
Armstrong also engages in productivity management, a result of which has seen productivity levels in terms of space, productive assets and manpower utilisation rates increase by 11-25% y-o-y. Management’s interest aligned with shareholders. Key stakeholders control about 46% of the company, of which CEO and Deputy CEO control about 40% of total shares. As of end FY10, variable components account for c.85% of CEO and Deputy CEO remuneration, representing an alignment of management and shareholders’ interests in our view.
Page 3
Equity Explorer Armstrong Key Management Team
Manager
Current Appointment
Experience
Mr Ong Peng Koon Gilbert
CEO
Founder of the Company. Mr Ong has >30 years of industry experience, and is a member of the Company’s Nominating Committee, holding various directorship in the Group’s subsidiaries.
Mr Koh Gim Hoe Steven
Deputy CEO
Mr Koh joined the Company in 1998 and was appointed to the board in 2000. Prior to this, Mr Koh has held several management positions in major banks and was the Chairman of the Singapore Club in South Korea. He holds various Diplomas in Banking, Accountancy and Management and various directorship in the Group’s subsidiaries.
Ms Sin Wan Lin
CFO
Ms Sin joined the Company in September 2011. She was most recently a Senior Audit Manager with Ernst & Young LLP.
Mr Cheng Song Chang Benny
Managing Director
Mr Cheng has >21 years of Manufacturing Information & Systems experience, having served 10 years in American MNCs like Digital Equipment and AT&T prior to joining the company in 1996 as a Corp MIS Manager. Mr Cheng has since risen through the ranks and was promoted in 2009 to be Managing Director. He holds a BSc in Computer Science from University of Houston, Texas.
Mr Wee Kim Teck Glen
President - Thailand operations
Mr Wee joined Armstrong Rubber & Chemical Products Co Ltd in 1999 and is currently the President of their Thailand operations. Mr Wee has >23 years experience in the manufacturing field in the various roles of manufacturing supervision, production management and the last 15 years in operations/business development management.
Source: Company, DBS Vickers
Page 4
Equity Explorer Armstrong
Segmental Breakdown FY Dec
2008A
2009A
2010A
2011F
2012F
2013F
46 22 66 46 2 182
51 18 57 48 1 174
53 23 77 70 2 225
50 21 66 72 2 212
53 23 71 82 3 230
56 24 75 92 3 250
FY Dec
2008A
2009A
2010A
2011F
2012F
2013F
Revenue Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net Profit before Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x)
182 (133) 49 (31) 18 0 0 0 0 18 (4) (2) 0 13 13 23
174 (130) 44 (25) 19 0 0 0 0 19 (4) (1) 0 14 14 24
225 (163) 62 (28) 34 0 0 0 0 33 (7) (2) 0 25 25 39
212 (164) 48 (36) 12 0 0 (1) 0 11 (4) (1) 0 7 7 18
230 (175) 55 (37) 18 0 0 0 0 18 (4) (1) 0 13 13 24
250 (189) 61 (40) 21 0 0 0 0 21 (4) (1) 0 15 15 21
(0.3) (24.9) (30.7) (25.2)
(4.8) 5.4 3.2 7.1
29.8 59.4 76.2 77.1
(6.1) (54.9) (64.2) (72.6)
8.8 37.9 52.6 94.4
8.7 (13.0) 14.9 16.5
27.0 10.1 7.2 16.0 9.8 15.1 38.1 162.1
25.4 11.0 8.1 15.8 9.8 13.8 56.9 77.8
27.5 14.9 11.0 25.6 15.9 22.4 80.6 94.7
22.5 5.7 3.2 6.6 4.2 6.5 17.7 20.5
24.0 8.0 5.8 11.8 7.8 10.6 17.7 52.9
24.5 8.4 6.2 12.5 8.3 11.2 17.7 60.8
Revenues (S$ m) Data Storage Office Automation Consumer Electronics / Automotive Others Total
Margins Trend
Income Statement (S$ m)
15.0% 13.0% 11.0% 9.0% 7.0% 5.0% 3.0% 2009A
2010A
Operating Margin %
2011F
2012F
2013F
Net Income Margin %
Strong earnings rebound due to recovery of business post Thai flood and absence of S$5-6m of impairment charges
Source: Company, DBS Vickers
Page 5
Equity Explorer Armstrong Balance Sheet (S$ m)
Asset Breakdown (2011) 2008A
2009A
2010A
2011F
2012F
2013F
Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets
42 0 2 27 28 35 5 138
40 0 1 30 27 48 4 149
40 0 1 26 37 55 5 165
40 1 1 6 37 74 5 164
39 1 1 10 39 81 5 177
45 1 1 10 44 88 5 194
ST Debt Other Current Liab LT Debt Other LT Liabilities Shareholder’s Equity Minority Interests Total Cap. & Liab.
8 35 2 0 85 8 138
11 36 2 0 94 6 149
15 39 2 0 101 8 165
15 32 2 0 106 9 164
15 33 2 0 117 10 177
15 36 2 0 130 11 194
33 17 80.0 53.6 67.9 1.4 2.2 1.4 CASH (0.2) 119.5 NA
42 17 87.4 61.9 79.9 1.2 2.3 1.7 CASH (0.2) 29.6 NA
57 10 83.5 56.0 73.0 1.4 2.3 1.5 CASH (0.1) 37.8 NA
84 (11) 111.8 49.6 84.7 1.3 2.6 1.7 0.1 0.0 31.1 NA
92 (6) 122.8 39.7 82.1 1.4 2.8 1.9 0.0 0.1 33.7 NA
101 (7) 122.9 38.8 80.3 1.4 2.9 1.9 0.0 0.1 33.7 NA
2008A
2009A
2010A
2011F
2012F
2013F
18 5 (4) 0 (4) 4 20 (12) 0 (1) 0 0 (12) (8) 2 0 (1) (7) 0 0 4.5 1.5
19 5 (4) 0 (9) (3) 9 (4) 1 (3) 0 0 (6) (5) 4 0 0 (1) 0 2 3.4 1.0
33 5 (6) 0 (15) (1) 16 (6) 0 0 0 0 (6) (18) 4 1 0 (14) 0 (4) 6.1 2.0
11 7 (4) 0 (26) 0 (12) (5) 0 (1) 0 0 (6) (1) 0 0 0 (1) 0 (20) 2.8 (3.4)
18 8 (4) 0 (8) 0 15 (6) 0 0 0 0 (6) (2) 0 0 0 (2) 0 7 4.4 1.8
21 2 (4) 0 (9) 0 10 (6) 0 0 0 0 (6) (3) 0 0 0 (3) 0 1 3.8 0.8
FY Dec
Non-Cash Wkg. Capital Net Cash/(Debt) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X)
Cash Flow Statement (S$ m) FY Dec
Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Currency Adjustments Chg in Cash Opg CFPS (S cts) Free CFPS (S cts)
Source: Company, DBS Vickers
Page 6
Net Fixed Assets 25.2%
Debtors 47.1%
Associates'/J Vs 0.8%
Bank, Cash and Liquid Assets 3.5%
Inventory 23.4%
We believe management intends to control net gearing below 0.2
Capital Expenditure 7 6 5 4 3 2 1 0 2009A
2010A
2011F
2012F
Capital Expenditure (-)
2013F
Equity Explorer Armstrong
Quarterly / Interim Income Statement (S$ m)
Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%)
Revenue Trend 56 (43) 13 (8) 6 0 0 0 0 6 (1) 0 4 4 7
53 (41) 12 (8) 4 0 0 0 0 4 (1) 0 2 2 5
56 (44) 12 (10) 2 0 0 0 0 2 (1) 0 0 0 3
(0.4) 0.9 0.9 (0.4)
4.6 (23.5) (26.7) (35.6)
(3.1) 20.0 23.6 35.9
0.2 (28.1) (32.5) (35.1)
(6.4) (28.7) (35.4) (47.9)
6.3 (35.8) (49.2) (94.2)
28.7 16.7 12.7
26.1 11.7 7.8
27.4 14.9 11.0
23.7 10.1 7.1
22.2 6.9 4.0
22.0 3.3 0.2
25% 20%
50
15% 40 10% 30 5% 20
0%
10
-5%
0
-10%
Revenue
3Q2011
56 (41) 15 (7) 8 0 0 0 0 8 (2) 0 6 6 10
2Q2011
58 (43) 15 (8) 7 0 0 0 0 7 (2) (1) 5 5 8
30%
60
1Q2011
55 (40) 16 (7) 9 0 0 0 0 9 (2) 0 7 7 11
70
4Q2010
3Q2011
3Q2010
2Q2011
2Q2010
1Q2011
1Q2010
4Q2010
4Q2009
Revenue Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Net Profit Net profit bef Except. EBITDA
3Q2010
3Q2009
2Q2010
2Q2009
FY Dec
Revenue Growth % (QoQ)
Includes S$5.7m of MTM losses
Source: Company, DBS Vickers
VALUATIONS Currently slightly below historical average, deserves to re-rate up to
Historical 12 month forward PB ratio (x)
mean on improving outlook. The stock currently trades at 1.26x P/B,
3.5
which is slightly below the past 5 years’ historical P/B of 1.6x. We
3.0
believe a re-rating to historical mean valuation on FY12F BVPS is fair, now that the worst is over and outlook is improving gradually. Based on 1.6x P/B, TP works out to S$0.40 per share, which translates to an upside of 38% from the current price. In the event
+2 SD
2.5
+1 SD
2.0 1.5
Avg
believe the counter could potentially re-rate upwards and beyond
1.0
-1 SD
+0.5 SD levels, or S$0.44 and above, as was the case in FY10.
0.5
-2 SD
that sentiment continues to power ahead of fundamentals, we
0.0
Risk Assessment: Moderate Category Earnings Financials Shareholdings Overall
Risk Rating 1 (Low) - 3 (High) 2 1 1
2005
Wgt
Wgtd Score
40% 20% 40%
0.8 0.2 0.4 1.4
Relatively low share price volatility. Armstrong engages in sharebuyback and has historically averaged dividend yields of c.4-5%. For FY11, we expect dividend payout to moderate in view of weaker result affected by the Japan earthquake in March and Thai floods in
2006
2007
2008
2009
2010
2011
2012
HDD Peers’ Comparisons Company
Price (local currcy)
Mkt Cap (US$m)
Regional HDD component supplier Amtek 0.67 292 Armstrong 0.285 116 Broadway 0.335 112 0.19 47 Cheung Woh Average
P/E Last Yr
Fwd Yr 1
Fwd Yr 2
6.5 11.5 nm 4.9 7.6
6.4 21.9 15.2 5.6 12.3
4.9 10.2 5.5 3.5 6.0
P/B
EV/ EBITDA
ROE (%)
1.9 1.5 0.6 0.6 1.2
5.7 4.0 1.9 4.0 4.3
34.4 25.6 21.4 19.3 25.2
Source: DBS Vickers, Bloomberg
Oct. Otherwise, given relatively strong balance sheet, the stock is unlikely to demonstrate any significant price volatility as compared to its peers.
Page 7
Equity Explorer Armstrong
DBSV Equity Explorer return ratings reflect return expectations based on an assumed earnings profile and valuation parameters: 1
(>20% potential returns over the next 12 months)
2
(0 - 20% potential returns over the next 12 months)
3
(negative potential return over the next 12 months)
The risk assessment is qualitative in nature and is rated as either high, low or moderate risk. (see section on risk assessment) Note that these assessments are based on a preliminary review of factors deemed salient at the time of publication. DBSV does not commit to ongoing coverage and updated assessments of stocks covered under the Equity Explorer product suite. Such updates will only be made upon official initiation of regular coverage of the stock. DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson (www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg (DBSR GO). For access, please contact your DBSV salesperson. GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers Research (Singapore) Pte Ltd ("DBSVR"), a direct wholly-owned subsidiary of DBS Vickers Securities (Singapore) Pte Ltd ("DBSVS") and an indirect wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). This report is intended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVR. It is being distributed in the United States by DBSV US, which accepts responsibility for its contents. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBS Vickers Securities (USA) Inc (“DBSVUSA”) directly and not its affiliate. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBSVR, DBSVS, and/or DBSVH) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. DBSVR accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a wholly-owned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. DBSVR, DBSVS, DBS Bank Ltd and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by DBSVR, DBSVS and/or DBSVH (and/or any persons associated with the aforesaid entities), that: (a) (b)
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Equity Explorer Armstrong
COMPANY-SPECIFIC / REGULATORY DISCLOSURES DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the company mentioned as 1. of 31-Jan-2012 2.
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