SINGAPORE, Oct 27 — Amtek Engineering Ltd says it is launching new programmes for networking and enterprise server enclosures, imaging and printing products to generate new revenue streams.

However, demand for its IT products is expected to remain slow.

The precision components, casings and enclosures maker believes that its automotive product remains positive in the long run although it saw weakening demand for car infotainment products.

It says its cost cuts have borne fruit, pointing to flat selling and administrative expenses despite generally rising labour costs.

Demand in US and Europe is stabilising while China is slowing down.

The company just announced earnings for Q4FY14:

Revenue: -5 per cent to US$152 million (RM497 million)

Profit: -84 per cent to US$1.8 million

One-off gains/losses: (US$0.7 million) vs US$5.1 million

Cash flow from operations: US$7.2 million vs US$13.2 million

Dividend (FY14): 2.3 S cents per share vs 3.3 S cents per share

Order book: Not disclosed

 

Revenue dropped five per cent  to US$152 million due to lower sales from existing programmes in networking and enterprise server enclosures, formerly known as casing and enclosures product sector.

Tools and dies, telecommunications, healthcare and medical equipment made up the biggest drop of 24 per cent to US$11.6 million, followed by IT products of 12per cent to US$12.9 million, mass storage down  eight per cent to US$17 million, and industrial products, which fell 7per cent to US$20.3 million.

1. Will dividends continue to slide?

Amtek’s dividends seem to be on a declining trend.

It declared 5.5 cents in FY11, 5.5 cents in FY12, 3.3 cents in FY13 and 2.3 cents in FY14.

The payout ratio during the same periods were 66 per cent, 89 per cent, 67 per cent and 72per cent respectively.

Therefore, it makes us wonder whether we will witness a further decline in future dividends.

Management Reply: The Company’s dividend policy is, subject to cash requirements, to distribute up to 50 per cent of net profit of the respective financial year as dividend. This has been consistent for the past 4 financial years.

2. How quickly can it drive sales to keep margins sustainable?

Amtek’s operating margin, derived after adjusting the selling and administrative expenses to gross profit, has been hovering around five per cent for a couple of years.

Its interest cost rose 43 per cent to US$8.5 million, which led to its net margin shrinking from 4.4 per cent in FY13 to 2.8 per cent in FY14.

So, it will have to drive revenues at a faster rate, now that it has both operating and financing fixed costs.

Management Reply: Amtek’s net profit margins were lower in FY14, due to higher financing costs (US$8.5 million) and non-recurring charges (US$3 million) in contrast with FY13 net profit margin which included a non-recurring gain of U$5.8 million. The Company raised S$200 million (RM513 million) MTN in March 2014 to partially finance its acquisition of Interplex Industries, Inc (which was completed in 1QFY15), which resulted higher financing costs due to the negative carry in Q4 FY14. Non-recurring charges were primarily related to professional fees incurred for the M&A activities in relation to the acquisition of Interplex Industries.

Excluding the foregoing items, net profit for FY14 would have been higher than FY13.

On the sales front, apart from contribution from the newly acquired Interplex Group, Amtek expects its record high tooling sales in FY2014 to go on to generate new revenue streams in the years to come. Nevertheless, the full potential of these sales would be dependent on healthy end market demand.

3. Is it now more efficient than prior years?

Amtek moved its entire Singapore manufacturing operations and consolidated them in Batam, Indonesia.

The expanded facility will offer precision progressive stamping, precision cold forging, deep drawing, precision machining, precision moulding and surface finishes capabilities, among others, in one geographical location.

Management Reply: Apart from consolidating our operations, Amtek was able to achieve headcount reduction from 11k in FY2011 to 9.3k in FY2014 through its automation and operational initiatives, thus improving its overall productivity.

4. Can we expect revenue to grow from Southeast Asia in FY15?

For FY14, Amtek recorded an overall growth of 1per cent in revenue to US$633.1 million, but profits declined 34.7per cent to US$17.5 million.

Revenue in China grew by 8per cent to US$369 million and Europe by 6per cent to US$69.1 million due to networking and enterprise server enclosures, automotive and tooling products.

However, the growth was offset by an 11per cent decline in revenue to US$195.1 million from Southeast Asia due to lower demand for mass storage and consumer electronics products.

Management Reply: The operating environment in the Southeast Asia region remains challenging with the sluggish IT products industry, putting pressure on the mass storage products industry sector. On the other hand, demand for consumer electronics products will largely rely on the consumer purchasing patterns on certain home appliance products.

5. When will it break even on its investment in Interplex?

Amtek completed the acquisition of Interplex in July, partly funded by the MTN programme which raised US$157.9 million.

The main synergy between Interplex and Amtek will be through the cross-selling of their products, says Amtek.

Interplex mainly produces connectors for the automotive segment.

Its technology is becoming increasingly relevant with the industry’s focus turning towards electric vehicles.

Amtek is also involved in producing metal and plastics components for Tesla.

Management Reply: Interplex has generated a proforma EBITDA of US$38.5M on its latest financial year ended 31 May 2014, and that works out to be approx. 4.8x historical EBITDA.

6. What makes it confident that automotive products will remain positive in the long run?

Amtek remains positive on its automotive products although it saw weakening demand for car infotainment products.

What makes it confident?

How much will automotive products contribute?

What are their plans in ensuring that the automotive products will remain positive?

How long can the automotive product contribute to the company?

Management Reply: Not provided

7. What are the new programme launches?

 

Amtek mentioned new programme launches for healthcare and life sciences, networking and enterprise server enclosures and automotive sectors on page 11 and 12 of its earnings announcement.

What exactly are the new product launches?

Management Reply: The product life cycle of automotive products ranges from 7 to 10 years. We remain positive on the outlook of the Automotive product sector for the Group largely due to the new programme launches for which tooling sales have been recognised. Most of our new wins are not related to car infotainment products. We expect the new programme launches to continue to contribute positively to the Group’s revenue going forward (see earlier comments regarding automotive product life cycle). However, the full revenue generation potential of these new tooling sales is, nevertheless, dependent on healthy end-market demand.

We thank Cecilia Tan for her response. — Investor Central

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