Source: Lim & Tan Securities Daily Review, 24 September 2007  

 

BEYONICS

 

Valuation Is Undemanding Relative To Takeover Valuation Of Peers

 

�� 4Q ended July 2007 net profit fell 7% yoy to $7.1mln (up 14% qoq) on the back of 15% yoy and 1% qoq decline in sales to $211mln, in line with expectations.

 

�� The weaker yoy comparison reflects the discontinuation of PBCA activities for Seagate,

 

decline in business volumes from Panasonic?s cordless phone business, foreign exchange losses and start up costs in their new factories in Thailand, Malaysia and China.

 

�� Operating cash flow was about the same yoy at $29mln, while capital expenditure was $49mln, down from year ago?s $67mln.

 

�� Financial position is reasonable with cash of $68mln and shareholders funds of $289mln versus debts of $103mln, giving a gross gearing of 36%.

 

�� As the company is looking out for potential acquisitions, final dividend was reduced from 2.5 cents per share to 2 cents per share (44% payout ratio), giving a net yield of 4.5%.

 

�� At last friday?s briefing, management were up beat about prospects in their new financial year ending July 2008, citing market share gains from Brilliant (production hiccups after the acquisition by Nidec) in the base plate business, strong demand from Seagate (recently revised up their sales and profit guidance by 15-20%), absence of start up costs in

 

their Malaysia, Thailand and China factories as utilization rates ramp up, and stable raw material prices.

 

�� Production capacity is expected to increase by 25-30% yoy to cope with the strong demand, likely costing them $25mln.

 

�� Management also revealed at last friday?s meeting that they have been approached by several parties who are interested to buy their HDD operations, but discussions are still in the preliminary phase.

 

�� Management is comfortable with consensus net profit estimate of 20% growth this year to $30mln, giving a forward PE of 8x. This reflects higher demand from Seagate, market share gains, higher demand from Dell (battery pack business), absence of start up costs, stable raw material price and enlarged production capacity. As its peers (Brilliant and MMI) were taken over at PE of 12-13x, we are upgrading Beyonics to a BUY.

 

Investors who wish to position into stocks with takeover potential should capitalize on the recent market sell-off and buy Beyonics. Technically, Beyonics has based out at $0.40 and should head for $0.47 to $0.49.