(BUY, USD2.16, TP: USD2.50)
Elek & Eltek (E&E)’s 1QFY13 results came in below expectations, with PATAMI of USD4.2m (-64.2% y-o-y) on the back of revenue of USD131.0m (-3.5% y-o-y), as the group continued to face downward margins pressure. We lower our earnings estimates to factor in the risks to its plant rationalisation process. Maintain BUY, albeit with a lower TP of USD2.50, based on a 14.2x blended FY13/14 P/E.
Margins decline further. While revenue improved 13.1% q-o-q to USD131.0m following the return of demand, gross margins took a hit, falling down by 1.2 ppts q-o-q to 10.3% (-5.1 ppts y-o-y). This further fall in gross margins was largely due to the USD5m forex impact as the result of the CNY appreciation as well as an additional USD1.6m in expenses arising from the minimum wage hike in China.
Yangzhou plant faces teething problems. Previously, despite the escalating costs, Management still expects the group’s gross margin to gradually improve following the production capacity expansion at its newly set-up Yangzhou site, as part of the plant’s rationalisation process. However, the group failed to ramp up Yangzhou plant’s capacity in time, attributing it to an inexperienced workforce with a high turnover rate. The plant’s current printed circuit board (PCB) production level stood at 350,000 sq ft per month, short of the targeted 500,000 sq ft per month. This in turn delayed the group’s plant rationalisation process in shifting its low-margin PCB production from Guangzhou to Yangzhou, leaving the Guangzhou plant with insufficient capacity to take on the high-margin high density interconnect (HDI) PCB orders. As such, profitability declined despite healthy order intakes.
Demand remains healthy. Management remain optimistic on its order intakes going forward, with healthy demand coming from telecommunication, mobile devices and automotive customers. Notably, the group has recently broken into the supplier list of the other Korean smartphone giant – LG. As such, whether E&E can deliver good financial performance depends largely on the group’s execution of its Yangzhou plant to achieve economies of scale. Therefore, we lower our FY13 and FY14 earnings forecasts by 44.2% and 8.0% respectively to factor in the execution risks to its plant rationalisation.
Publish date: 02/08/13