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Pinnacle
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19-Nov-2007 20:48
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OCBC - EMS revamp in the works Muted 3Q07 but worst likely over. Electrotech Investments Limited (EIL) posted a pretty muted set of 3Q07 results, but the worst is likely over. Although revenue rose 18.1% YoY to S$64.3m, gross profit fell 15.0% to S$10.2m, hit by higher production costs and introduction of new products at its Mechatronics division, as well as soft pricing of keypads at its EMS division. Nevertheless, thanks to a 33% fall in the effective tax rate from 26% to 18%, earnings fell by a smaller 4.2% to S$6.1m. And on a sequential basis, revenue inched up 4.7% and earnings climbed 3.8%. While these numbers are not fantastic, these do suggest that the situation has definitely improved for EIL. For 9M07, revenue rose 12.0% to S$182.5m, while earnings slipped 7.2% to S$17.4m. 4Q07 outlook remains upbeat. Going forward, the outlook remains upbeat, with management expecting its Mechatronics division to grow its FY07 revenue by 15-20%, led by its medical segment. Based on our calculations, it implies a growth of 23% YoY in 4Q07. Also absent will be the summer shutdowns which affected utilization and margins in 3Q07. As for its EMS division, EIL is looking for lower YoY revenue growth for FY07. In particular, EIL believes its keypad business will be 25% lower YoY, but we expect this shortfall to be partially offset by strong growth of its office automation (OA) and automotive (AU) segments. EMS revamp in the works. Even though its keypad business is expected to improve further in 1H08 based on new models secured or under negotiation, market conditions remain challenging due to volatile revenue, short visibility and lower margins. As such, management is working to shift its focus from keypads to its OA and AU business to enhance long-term stability (see Chart 1). And because the strategic shift was initiated some two years ago, EIL has already started to reap some fruits (see Chart 2) and will be looking to harvest more in the 2008 and 2009. Potential for higher cash dividends. EIL is sitting on a healthy cash hoard of S$38.8m, or S$0.12 per share, which it may utilize in several ways; acquisitions to boost its contract manufacturing capabilities, especially in the analytical, medical and industrial products area; return the excess cash to shareholders via special dividend or capital reduction means. We do not have a rating on the stock. |
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