Wednesday, October 19, 2011

OSK Research maintains Sell on Eng Tek, FV RM1.24

KUALA LUMPUR: OSK Research is maintaining its Sell call on Eng Teknologi at a revised fair value of RM1.24 based on 0.6 times FY12 price to net tangible asset, down from 0.7 times previously.

It said on Wednesday, Oct 19 that although the share price has retraced by some 15% since its last downgrade two days ago, it believes investors will turn even more cautious as the current flood in Thailand is not showing any signs of subsiding.

'We foresee further downside risks should the flood situation persist, which could compel the bankers of TYK Capital's privatisation offer to have second thoughts over the proposal,' it said.

On Tuesday, Engtek released an official statement on Bursa Malaysia regarding its Thailand operations amid existing floods in the Ayutthaya province.

The management has confirmed that operations in both its Rojana and Hi-Tech Industrial Park were suspended, while production in other facilities were also experiencing disruptions as their major customers in Thailand are situated in the flood-hit areas.

'The announcement did not come as a surprise as we highlighted previously that all five industrial estates in Ayutthaya have been confirmed to be inundated by water by the Thai army. Given the significant presence of most HDD component manufacturers within the flood-hit province, we continue to expect the negative developments to take its toll on the entire HDD component supply chain,' it said.

OSK Research said Thailand contributes 75% of Engtek's sales. With a total 400-500 CNCs installed, Engtek's two factories in the Ayutthaya province supply some 40% of its total production.

'While we believe management would attempt to mitigate any near-term production shortfall by increasing the production from its existing facilities in China, Philippines and Malaysia, we opine what is more of a concern here is that Thailand typically contributes 75% of its consolidated sales,' it said.

OSK Research said given the presence of almost all major HDD makers in the region, i.e. Western Digital, Seagate, Hitachi, and Toshiba.

The research house said due to the severity of the aftermath damage, the entire HDD supply chain is likely to be hit and we foresee downside risks not just on its Thai facilities but also its existing operations in the rest of the region. 'Restoration to pre-flood production level would depend largely on how fast all the HDD component manufacturers can shift their respective production out of Thailand in the immediate term and how soon the flood in Thailand would subside in the near term,' it pointed out.

OSK Research said due to the fluidity of the situation with all of the flood-hit industrial parks sealed off by the Thai army as a precaution, the magnitude of losses suffered remains unknown at this point of time.

'Although we make no changes to our forecasts for now, we foresee a difficult 4Q11 given the widespread aftermath impact. Should the monsoon rains subside by the end of this month, realignment or replacement of machineries will take at least another two to three months and hence, we expect production to normalise only by 2Q12 in our base case scenario,' it said.

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