(NEUTRAL, SGD0.275, TP: SGD0.30)
Broadway Industrial (BWAY)’s 2QFY13 results were below estimates, with a core PATAMI loss of SGD1.1m on the back of a 8.5% y-o-y drop in revenue to SGD158.6m. We expect the Group to face an uphill task in rationalising its HDD operation while garnering new clients to take up excess capacity. Maintain NEUTRAL, with a lower SGD0.30 TP, based on 0.6x FY13 P/BV (-0.5SD from the stock’s 5-year historical mean).
HDD outlook unexciting. Losses at BWAY’s hard disk drive (HDD) business persisted, with the unit posting an operating loss of SGD1.5m despite the 16.4% y-o-y and 17.1% q-o-q growth in sales to SGD97.9m in 2QFY13.
With demand from the HDD industry is expected to stabilize while research firm Gartner has forecast a 2% CAGR for the industry going forward, we expect the Group’s HDD business to remain lacklustre for a prolonged period as a result of over-expansion in its capacity (ie excessive equipment and labour). Despite having deployed the excess machinery to its non-HDD business, BWAY’s excess workforce - coupled with downward pricing pressure and rising production costs - present Management with an uphill task in returning the division to the black. .
Foam plastic business the key driver. As expected, BWAY’s foam plastic business saw muted growth in 2Q, generating sales of SGD41.2m (+0.0% y-o-y, -16.9% q-o-q). Nevertheless, Management anticipates new projects bearing larger volumes and better margins to kickstart in 2H. We expect this segment to remain as the group’s key profit driver.
Non-HDD business fraught with challenges. While we expect BWAY’s semiconductor business to perform in line with the brighter industry outlook, we remain cautious on the group’s venture into consumer electronics. Even though Management has been aggressively pursuing new customers (in order to utilise its excess machinery), we have concerns over the credit profiles of its potential clients. This could potentially pose risks to the group’s financial health. The Group is saddled with a high net gearing of 67% as of end-2QFY13 although this has yet to cause alarm. Elsewhere, its receivable days have been trending higher.
Publish date: 01/08/13