Broadway released a set of results, slightly below consensus estimates, causing the share price to slump 9% as at Friday. Nevertheless, if one looks at the analyst target price (Figure 1), one would have noted the significant discrepancies between the various research houses. There are three “buy” calls as opposed to one “hold” call. Average consensus target is $1.62.
Figure 1: Analyst target prices on Broadway
Source: Bloomberg as of 28 Oct 10
Let’s take a look at its results tabulated below.
Table 1: Snapshot of Broadway’s results
|
3QFY10
|
3QFY09
|
% chg
|
9MFY10
|
9MFY09
|
% chg
|
|
|
Sales (S$m)
|
144.7
|
136.9
|
5.7%
|
437.6
|
412.3
|
6.1%
|
|
Gross Profit (S$m)
|
20.7
|
18.7
|
10.7%
|
66.9
|
53.1
|
26.0%
|
|
Net Profit (S$m)
|
12.5
|
8.7
|
44.8%
|
34.8
|
21.7
|
60.3%
|
|
|
|
|
|
|
|
|
|
No of shares (m)
|
207.9
|
207.9
|
0.0%
|
207.9
|
207.9
|
0.0%
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
14.3%
|
13.7%
|
NA
|
15.3%
|
12.9%
|
NA
|
|
Net Margin
|
8.7%
|
6.3%
|
NA
|
8.0%
|
5.3%
|
NA
|
|
|
|
|
|
|
|
|
|
Earnings per
share (Scts) |
6.0
|
4.2
|
44.8%
|
16.7
|
10.4
|
60.3%
|
|
Dividends per share (Scts)
|
0.0
|
0.0
|
NA
|
2.0
|
1.0
|
NA
|
|
|
|
|
|
|
|
|
|
Dividend Yield
|
NA
|
NA
|
NA
|
NA
|
NA
|
NA
|
Source: Ernest’s compilations, company
From Table 1 above, it is apparent that Broadway’s 3QFY10 and 9MFY10 results are strong. Excluding the foreign exchange gains, profit before tax for 3QFY10 and 9MFY10 would have risen 17.9% y/y and 66.1% y/y respectively. Nevertheless, these results lagged behind consensus analyst estimates. In addition, Broadway’s management tepid outlook, coupled with remarks from hard disk drive (“HDD”) bellwethers such as Seagate and Western Digital sap optimism on the counter.
Any investment merits then?
Comfortable valuations: At Friday’s closing price of S$1.11, according to my personal estimates, Broadway is trading at a 5.1x FY11PE, with a forward dividend yield of 4.5%. Reasonable valuations, coupled with a respectable dividend yield are likely to limit downside for Broadway.
Potential M&A target Broadway may likely be a potential takeover target as it commands 20% global market share in actuator arms used in HDD. Its low valuations, coupled with a strong balance sheet, low gearing of 19% are attractive attributes of takeover targets. Furthermore, Broadway’s Founder and Chairman Wong Sheung Sze who is approaching retirement age and owns 36.3% of the company may be willing to sell his stake if an opportunity comes about.
Potential spillover effects from Armstrong: According to Lim & Tan report, several parties have approached CIMB (being the financial adviser to Armstrong) to express interest on Armstrong. Based on previous takeover deals in Singapore, they were transacted between 12 to 17x PE. If Armstrong M&A materializes or any takeover on the HDD players in Singapore, there should be positive spillover on Broadway, being one of the global suppliers in the actuator arms segment with one of the lowest valuations.
Non-HDD and foam division should spur some growth: Broadway has successfully acquired the new machining facility in Suzhou which would approximately increase its non-HDD by 40%. It expects to ramp up its utilization rate from the break even levels of 50-60% in 3Q and this is expected to contribute positively in 2011.
Secondly, Broadway’s foam plastic division expects to continue its growth momentum by increasing market share. It is setting up a new facility in Chongqing to support a major customer and to secure new customers in the region. As Chongqing is rapidly emerging into a major manufacturing hub, this move bodes well for Broadway as it endeavors to secure a first mover advantage with multi national companies setting up operations in the region.
Notwithstanding the above initiatives, it is noteworthy that non-HDD and foam plastics contribute about 29% of its 3QFY10 revenue. (i.e. HDD segment still contributes about 71% of 3QFY10 revenue.)
Proactive in cost reduction: Management is cognizant with the rising labour costs in PRC and it is planning to relocate its factories from Shenzhen to Sichuan next year which is likely to reduce its manufacturing costs by up to 60%. Nevertheless, this shift is gradual and entails re-qualifications by their customers for their new facilities. Thus, this is arguably good over the long term but may not be good for the company in the short term as daily business operations may be disrupted with the relocation.
Potential dividend surprise: Broadway distributed S$0.02 for 1HFY10, up 100% y/y. During its FY09 statements, Broadway announced a final dividend of S$0.02 for 2HFY09. Against the set of strong 9MFY10 results, coupled with a reduction in debt level this year, Broadway is likely to announce a final dividend of S$0.02 and a special dividend of around S$0.005 – S$0.01. If this materializes, the dividend yield would be 3.9% – 4.3% for 2010, based on the closing price of Broadway around S$1.11. The worse case should be a final dividend of S$0.02, representing a respectable yield of 3.6% dividend yield.
Potential risks
HDD – slowing down: Typically, 4Q is a strong quarter (if not the strongest) for HDD players as there is more demand for HDDs in the holiday season. Nevertheless, Seagate, the world’s largest HDD manufacturer and one of Broadway’s key customers mentioned in a company’s statement saying that 3Q sales were at the low end of its guidance range as it faced an ample availability of hard drives during the quarter and waning demand from U.S. and Europe, especially due to the popularity of tablets such as Apple’s iPad which use flash storage instead of hard drives. Seagate also declined to provide guidance for the 4Q or 2011, which muddles the outlook on Seagate and the HDD component manufacturers such as Broadway.
Lack of major earnings catalysts in 2011: Besides the slowdown in HDD, non-HDD division is unlikely to give a significant boost to earnings next year (as seen in this year.) This year, non-HDD division is expected to breakeven from the S$14m loss posted in 2009. This alone (albeit simplistically taken on face value), would have increased Broadway’s 2010 earnings by S$14m from a year ago.
Conclusion: Valuations, coupled with a respectable dividend yield should limit downside
Growth is likely to normalize next year from the heady growth this year. Nevertheless, low valuations, good dividend yield, positive cash flows, low valuations and the potential of being an M&A target, are factors which are likely to limit downside. Support established at $1.00 and $0.935.
This writeup is an amended (and delayed) version The original has been complied and sent out to my clients on 2 Nov.
Disclaimer
The information contained herein is the writer’s personal opinion and is provided to you for information only and is not intended to or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.
The information contained herein is the writer’s personal opinion and is provided to you for information only and is not intended to or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.
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