We are upgrading our full-year net operating forecast by 12% to S$17.0m (+67% YoY) on the back of a robust Q207 and indications that H207 will be stronger than expected, driven by the automotive, data storage and rubber businesses. Along with the earnings upgrade, we are also raising our 12-month target price to S$0.57. That said, Armstrong is also accelerating plans to sell its last non-core asset, a long-standing industrial land joint venture (15% stake) with private developer Soon Lee, for which it may need to make a write-off sometime this year. But this will be a non-operating charge and will result in greater cash inflow for the company.

♦ Auto business was firing on all cylinders in H107

Armstrong?s auto business is gaining greater-than-expected traction with operating success, particularly evident in Changchun, which makes door panels for Peugeot in China and mirror gaskets for Schefenacker Vision Systems Australia (SVSA), as well as Tianjin, which supplies parts to Denso. This year, Peugeot expects to sell 140,000 units of the 307 sedan and 206 supermini in China, up from its previous target of 100,000 units, and triple its 2006 sales volume of 40,000 cars. Further, SVSA has already ramped up to 30,000 gaskets a month or 90% of its full-year commitment, up from just 4,000 a month last year.

♦ H207 will be further boosted by new auto orders

In H207, Armstrong will begin supplying a further four door panels for Peugeot (four currently). Armstrong is also gaining market share with Denso. A new contract to supply 30 new aircon parts, which will increase its Tianjin plant?s revenue by 30%, was recently wrested away from a rival in Shanghai. With the greater business flow, Armstrong is in the process of expanding capacity in Changchun. A new plant is currently being built there, which will increase the production area from 5,500 sqm to 12,000 sqm by end-2007. This has already been factored into our capex forecast of S$8m.

♦ Other parts of the group are also doing well

Overall, data storage revenue is still better Y/Y despite slight softness by Seagate in Q2. For the full year, this will be supplemented by higher WD orders as it continues to benefit from second-source demand following the merger of Seagate and Maxtor. Further, the expansion into rubber and film products has also started to reap dividends. We estimate rubber profits for H107 to be 2.5x more than the whole of 2006. Lastly, its underperforming unit in Malaysia (undermined by the ailing Proton) has also turned around, supported by new electronics customers.

♦ Disposal of last non-core asset will be welcomed despite likely write-off

Armstrong currently carries S$10.7m on its books for a 15% stake in a piece of industrial land in Singapore that it bought in 1997. This is the last non-core asset carried forward from the old Armstrong that management wants to sell. Depending on the sale price, a write-off will probably be needed. We would welcome the disposal as it would free up cash that can be re-invested in the core business. At Armstrong?s projected ROA for this year, a write-off could be recovered in as little as two years.