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Since the outbreak of the Covid-19 pandemic, air travels have been impacted significantly following the closure of borders in many countries. Besides the tourism and airline industry, airplane manufacturers and their chain of suppliers were equally victims of the industry-wide crisis.

Nevertheless, with the distribution of vaccines gaining pace globally since January 2021, we may expect light at the end of the tunnel for the tourism and the air travel industry as early as mid-2022. 

At the point of writing, 188.3 million doses of vaccines have been administered globally.

In this article, we introduce SAM and discuss the Group’s outlook and strategy forward as they steer through one of the worst crises in its aerospace segment. We view SAM as an investment target you ought to miss to bet on the recovery of tourism and air travel.

SAM, a 70% owned-subsidiary of Singapore Aerospace Manufacturing Pte Ltd, is an established manufacturer of parts for the aerospace, semiconductor, and disk drive industry. The Group has operations in Penang, Thailand, and Singapore.

The aerospace segment has over the years been SAM’s main income source, contributing about 60% of the Group’s total revenue. In FY2020, the downturn in the aerospace segment and upcycle of the semiconductor and disk drive segment have caused a shift in SAM’s overall business.

As of 30 September 2020, the equipment segment contributes up to 83% and 100% of the Group’s total revenue and profit respectively. The Group’s revenue composition by segment since FY2015 is depicted as below.


For the Aerospace segment, SAM’s products include:

  • Complex engine cases used extensively in Airbus and Boeing aircrafts, as well as Regional and Business Jets;
  • Fan casings for commercial aircraft; and
  • Aerostructure parts as large as 3m

For the Equipment segment, SAM offers:

  • Built to print precision tools, jigs, and fixtures; modular and equipment assemblies, primarily for the Disk Drive, medical, automotive, and semiconductor industries;
  • Sheet metal fabrication i.e. hot/cold rolled steel, engineering plastics, stainless steel, etc;
  • Manufacturing of high precision milling and turning parts;
  • Secondary processes such as phosphating pre-treatment, wet paint & powder coating facilities; and
  • Design & development of customized automation solutions, consulting & project development, production & assembly, and integration & service

SAM’s customers are mainly in the semiconductor (front end & back end) and storage devices (solid-state drive and hard disk drive) industry. On the other hand, they also serve other world’s leading brands in the LED, automobile, telecommunication, and renewable energy industry.


HEALTHY GROWTH COUPLED WITH CONSISTENT PROFITABILITY

Note: SAM’s financial year end falls on 31 March.

Since FY2015, SAM’s revenue grew at a 5-year compounded annual growth rate (“CAGR”) of 15.8% p.a. In the latest financial year, growth was impressive at 24.3%.

Throughout the 6 years, SAM’s gross and net profit margins ranged between 11.3% – 16.5% and 7.6% – 10.2% respectively. Profitability was healthier in the recent 3 years, with GP margins consistently above 15.1%; however, a higher effective tax rate in FY2019 & FY2020 caused a drag on its net margin.

Overall, the Group displayed strong business fundamentals, capable of sustaining a high growth rate while maintaining its healthy profitability over the years. Its 6-year average return on equity (“ROE”) was 12.1%, with FY2020 ROE closing at 13.1%.

Note: FCF = CFO less ‘Net cash flow from investing activities’

The Group generates healthy cashflows from operations, with a 6-year average CFO to Net income ratio of 0.9x.

However, the Group has been recording negative FCF for 4 out of the last 6 years. The deficit was funded via drawdowns of bank borrowings. Main reason for the significant deficit was due to heavy investments spent on capital expenditure (“CAPEX”). Refer to table below for details.

According to the Management, CAPEX investments in the recent 3 years were to accommodate for increased orders from its aerospace clients.

Following the industry-wide crises, the Management has taken steps to repurpose its production line for the equipment segment. Their machines can be used interchangeably for both segments.

On the balance sheet position, SAM shows strong liquidity and solvency despite a build up on its debt levels in recent years. Gearing level, interest cover and current ratio remain very healthy at 0.14x, 24x and 2.2x respectively.

Further, we draw full comfort on SAM’s debt position given its strong ability to generate positive cash flow from operations. In the recent 3 years, the Group generated an average CFO of RM65.2m p.a (FY2020 interest paid was RM4.5m).


FINANCIAL RESULTS FOR 1H2021

For the 1HFY2021, SAM’s revenue and net profit decreased by RM13.7m / 3.4% and RM31.5m / 81.3% respectively, as compared to 1HFY2020.

By segmental analysis, we note that the Group had made commendable efforts to repurpose its production line. Nonetheless, the increase in equipment sales is insufficient to compensate for the loss suffered at its aerospace segment.


KEY STRENGTHS

  • Impressive revenue track record of 14.6% CAGR since FY00. Out of the last 20 years, the Group only made losses in 4 of the years, of which 3 years were during the global financial crisis.

For the last decade, the Group has made 10 years of consecutive profits, with a relatively consistent net margin of about 8% p.a.

  • Experienced management team who have been with the Group for the past decades. They continue to show agility in responding to the latest crisis.
  • Flexibility of its production line to switch between types of products manufactured. This provides the Group an opportunity to ride on the strong demands for semiconductor products in the next few years.
  • Ability to secure 1st tier clienteles i.e. Boeing and Airbus and to supply one of the most critical parts of a plane i.e. engine cases send a strong message of SAM’s products and services quality.

KEY RISKS

  • Further delays on orders recovery from the aerospace segment.
  • Currency risk as 90% of the Group’s revenue are denominated in USD. Comfort drawn given 60% of its costs are denominated in USD.
  • Low and illiquid volume with a retail public spread of about 10% only.

MAJOR SHAREHOLDERS AS AT 2 JULY 2020

Singapore Aerospace Manufacturing Pte Ltd holds a direct stake of 71.7% in SAM.

Institutional investors holds about 10% in SAM, including iCapital Berhad (3.5%), Public Investment (5.5%), Affin Investment (0.2%), Manulife (0.2%) and PERKESO (0.2%), etc.

Based on the distribution schedule, the top 46 shareholders of SAM control 88.8% of the Group.


PEERS COMPARISON

Table below compares SAM to several peers within the precision engineering service providers.

The chart below depicts SAM ’s PE valuation range, over the past 10 years.

Prior to 2018, SAM has been trading at a PE range of about 18x – 30x. Since 2018, the Group’s valuation deteriorated, impacted by one of its key customers (i.e. Boeing), which faced setbacks on the production suspension of Boeing 737Max.

In 2020, SAM’s valuation declined to a decade low of about 10x – 20x due to the outbreak of Covid-19.

Nevertheless, taking into consideration of SAM’s track record, business model, management team, and prospect forward, we would value SAM around its previous year PE range, at 18x – 25x.

We are optimistic that the recovery of air travel by mid-2022 and surge in demand for semiconductor-related parts would catalyze SAM’s growth for the next 3 – 5 years.


OUTLOOK

In our opinion, SAM is uniquely positioned to benefit in the medium term. The Covid-19 pandemic that has beleaguered the global aerospace industry has shown signs of recovery, with increased demand for domestic air travel. Additionally, the demand for semiconductors and data storage devices used in communications and IT infrastructures has risen tremendously

We do think the demand for semiconductor-related parts will be sustained, driven by technological advancement across the industry including biotechnology, telecommunications, automotive, etc.

In the 1H2021, we note a significant surge in SAM’s sales for the equipment segment, achieving 66.5% of FYE2020 equipment segment results.

In the shorter term, the management has indicated to have taken steps to reduce losses from its aerospace segment, including measures such as:

  • Senior management pay cut of 5% – 10%;
  • Wage hike and hiring freeze;
  • Reallocating manpower to equipment segment; and
  • Reducing purchase of raw materials for aerospace segment to preserve cash.

VALUATION BASED ON EQUITY BOND THEORY

Assumptions:
1. FY2021 revenue was arrived by annualizing SAM’s 1H revenue results. Revenue growth was conservatively estimated to be 10%, 15% and 20% for the next 3 financial years. For the past 5 years, SAM’s revenue grew at a 5-year CAGR of 15.8%. Growth in FY2020 was 24.3%. Our assumption is based on our optimism of the semiconductor industry and confidence for orders from aerospace segment to recover by 2023.
2. Net margin was assumed to strengthen moving forward as business order picks up across segments. By 2024, we assume its net margin to normalize to its 6-year average margin of about 8%.
3. We assumed no change to the Group’s share base.
4. We assumed based on SAM’s average dividend payout ratio for the past 6 years.
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https://www.the1994investor.com/02/2021/sam-1/stocks-coverage/sam/

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