1Q12 net profit of US$9m (-27.8% y-o-y) fell short of our US$11.3m forecast. Key variance was weaker than expected gross margin, down 1.3ppts to 16.7%, because of higher tooling works, which were strategically sold at costs to drive future component sales. Strong USD against operational currency (SGD, RMB) also resulted in forex losses vs gains last year. We had expected Sep quarter to be seasonally strongest but 1Q12 earnings only met 20% of original FY12F.

Revenue improved 9% y-o-y to US$182m, thanks to growth in all segments except Mass Storage (-1%). For the quarter, Amtek generated US$3.8m of FCF and lowered net gearing to 0.12x from 0.14x last quarter.

2Q12 is uncertain and negative. Firstly, Mass Storage (15% of sales) will be dragged by disruption in the HDD supply chain as a result of the floods in Thailand even though Amtek’s plants and customers are not directly affected. Over at Casings & Enclosures, (25% of sales) new products were deferred due to macro uncertainty. Automotive (14% of sales) is equally fluid because growth in China (60% of auto sales) could continue to slow on cooling measures and Europe (40% of auto sales) could be affected by the European debt crisis.

Downgrade to Fully Valued on potential downside to new TP of S$0.51. Although our original earnings were 13% below consensus, we have cut FY11/12F by another 20% as we impute lower gross margin and weak demand outlook. Consequently, our TP is reduced to S$0.51, still based on –1SD valuation peg at 5.5x FY12 PE.