Amtek Engineering solid growth with 5% yield

ICB Industry : Industrials
ICB Sector: Industrial Engineering
Principal Business: High precision metal/plastic components: from tooling, stamping to cold forging and mechanical assembly.

Amtek is one of the world's largest precision engineering companies. Amtek is an end-to-end design and manufacturing solution provider for precision components, casing and enclosures. Its recent acquisition of Interplex Industries - a miniature precision engineering player - in July 2014 is fairly positive.

Cross-selling, cost-cutting and growth of automotive sector are three key drivers. Interplex has relationships with original equipment manufacturers (OEMs) including brands like Continental, Denso in Automotive and Apple in mobile devices, likely to result in cross-selling opportunities. There is also ample room to cut costs. Interplex generated $360m sales from 19 factories while Amtek generated $630m sales from 15 factories. Meanwhile, automotive sector is the largest contributor (22% of group revenue) and also secures better margins than other segments. This segment is likely to see double-digit growth with China and US as the key markets. 1Q15 net profit of US$4.1m (hit by one-off acquisition cost of US$4.7m) suggests healthy momentum going forward.

Trading at 9.5x FY15F EPS versus 4-year historical average of 11x. Initiate with BUY and our target price of S$0.74, pegged at 11x FY15F EPS at 15% discount to peers’ average of 13x. The stock also offers over 5% yield. Assuming sustained execution, the stock is quite attractive at 8x FY16F PER and 6% yield. The key risk would be slower-than-expected growth in key markets of US and China.