What's HOT & What's NOT

Broadway Industrial Group
No mean player
1 November 2007
by Jonathan Ng & Jacky Lee

OUTPERFORM

Uninterrupted earnings growth since 2002.
Broadway’s profits grew by 120% CAGR between 2002 and 2006, lifted by continuous growth in its HDD component business and the realignment of its packaging business. We expect net profit and EPS to grow by a healthy 32% and 18% CAGR respectively between FY06 and FY09, underpinned by both its component and packaging businesses.

To ride healthy HDD demand.
Broadway, through its wholly-owned Compart Asia, is one of the world’s top three actuator-arm suppliers and is expected to gain from healthy HDD shipments, projected to grow by 14% CAGR between 2006 and 2009. Its two major HDD customers, Seagate and Hitachi, are also growing ahead of the industry. A further boost in the HDD component business could come from greater allocations from Hitachi as Compart has been qualified to serve Hitachi’s whole spectrum of products since early 2007.

Expanding to serve non-HDD industries.
Compart has also diversified into non- HDD industries for its component business, targeting the semiconductor and automotive sectors. Although the outlook for semiconductor equipment remains weak, projected to be flat yoy in 2007 and up 8% yoy in 2008, Compart’s business should be less affected as it is involved in consumables and gaining allocation.

Packaging operations located in main manufacturing hub for electronics products.
Following the divestment of its South-East Asian packaging business in 2002, all its manufacturing facilities for packaging are now located in China, which is the main hub for electronics products. We expect this packaging business to grow in tandem with the increased manufacturing of electronics products on the mainland.

Initiate with Outperform and target price of S$1.93.
Broadway trades at only 5x CY08 earnings (on an enlarged number of shares post-acquisition of the remaining 44.15% stake in Compart), which is way below the industry average of over 9x. Our target price of S$1.93 pegs Broadway at 10x CY08 earnings, which is the average P/E we set for HDD component suppliers under our coverage. We believe this is not excessive, supported by valuations used by private equities and companies in recent M&A deals in the HDD component space (Amtek: 10.0x CY08 our projected earnings; MMI: 10.2x; Seksun: 10.7x; Brilliant: 22.5x consensus CY08 forecast). We see potential catalysts from healthy sets of results and a successful diversification into non-HDD businesses.