Target price: $0.40 (maintained) Previous day closing price: $0.27

What’s New

Action & Recommendation

Armstrong remains on our Buy list. It is one of the best-managed small caps in Singapore. Despite better-than-expected FY09 results and a 60% surge in declared dividends, the stock still trades at less than 7x current year earnings and offers an attractive dividend yield of 6%.

Target price: $0.40 (raised from $0.39) Previous day closing price: $0.27

We believe Armstrong is on the cusp of a golden age of growth, driven by volume and margin growth as it moves further to secure its leading position in the foam and rubber parts supply chain for the automotive and data storage industries. Supported by a capable management and backed by low valuations (<7x PE) and attractive yield (>6%), we maintain BUY with $0.40 target price.

Recovery year…

Full year net profit of $14.1m was above our expectations of $13.1m. 4Q09 revenue growth of 20% was the strongest Armstrong has experienced since 2007. At the trough, core net profit fell to just $1m but by 4Q, had rebounded to almost $6m. Equally rapid was the rebound in margins from a low of 2.1% at the net level in 1Q09 to a near-record high of 12.3% in 4Q09.

… driven by automotive and data storage

Growth came mainly from automotive and data storage components, which accounted for 29% and 27% of full year revenue respectively. Automotive growth was driven mainly by China domestic demand and maiden contributions from a new, high value car seat component. Data storage, primarily rubber and foam products for hard disk drives, grew on the back of a strong volume recovery from Seagate and WD.

Riding the margin curve via new products

According to management, 4Q’s positive momentum has spilled over into 2010, with a strong January. This year, we expect the volume recovery of 2009 to be amplified by margin growth, driven by higher margin new products. The car seat component should be a key contributor, while catalysts in data storage include market share gains and customer actions to include higher value materials in their products.

7x PE + 6% dividend yield = compelling BUY

In addition to delivering on the promised earnings recovery, dividends also surprised on the upside. Almost 60% of earnings ($0.016/sh) was declared as dividends, a 60% jump from 2008! We expect this dividend to be sustainable as capex is expected to fall in 2010, boosting already strong cashflow even further. At 6x PE, Armstrong is a BUY with a target price of $0.40 (10x 2010F).