After the flood, a mass tech take-off?

Battered tech companies mired in Thai flood problems will play catch-up in 2012, says DBS.

Singapore tech firms took a heavy beating last quarter after abnormally severe flooding in the Thai capital Bangkok disrupted manufacturing processes.

Firms will now work double time to sate demand, which DBS believes never dissipated and was only delayed with the disaster, it said in its sectoral assessment of technology companies. The brokerage firm was particularly optimistic on the foursome of Seagate, HDD, Broadway and Armstrong.

Here's more from DBS:

Last night, Seagate guided for higher sales of about US$20bn for 2012, 14% above street estimates of US$17.5bn. Seagate bounced back from last year’s floods in Thailand much faster than peers as its plants were not directly hit by floodwaters. Moreover, drive shortages have helped push up prices, boosting the company’s bottom line. For the quarter ended 31 Dec, Seagate's net income more than tripled to US$563m as sales increased 18%.

As mentioned previously, HDD stocks are poised for a rebound on re-stocking demand. This sector is also one of the most oversold. Natural disasters suppress supply temporarily but do not destroy demand. In fact, disasters clear out old products to create or accelerate replacement demand. Hence, when the HDD supply chain recovers from the Thai floods sometime in mid 1H12, we believe re-stocking demand will be the most apparent catalyst for tech earnings to snapback nicely after seeing the worst in 4Q11.

Among the tech stocks in Singapore, we see stronger turnaround potential for Broadway and Armstrong by virtue of their significant exposure to the HDD supply chain. HDD accounts for 60-70% of Broadway’s group sales and 23% for Armstrong. Moreover, both stocks are among the most heavily sold down tech stocks, as shown by share price performance in 2011 and 6 months ago.

At 0.6x FY12 P/BV, Broadway is the cheapest turnaround play in HDD. Broadway, a key actuator arm supplier to Seagate, is a good proxy for the HDD rebound that is expected in 1Q12. Although we expect Broadway to report its largest ever loss of S$10m in 4Q11, we are optimistic that earnings will rebound quickly in 1Q12 as Broadway ramps up its Wuxi plant to support Seagate (45-50% of sales), which is benefiting from WD’s disruptions.

Thereafter, we expect growth momentum to gather speed as production capability and capacity in Thailand are gradually restored. We believe potential market share gain by Broadway will be permanent, as some smaller rivals have fallen out as a result of the floods. While our expectation of earnings rebound is premised on its existing client base, we look forward to earnings upside from new customers. According to market sources, Broadway has been seen engaging new customer recently. Non-operationally, there is scope for writeback of unrealized MTM losses and impairment charges to boost bottomline.

Now that the worst is over and outlook is improving gradually, Broadway deserves to re-rate to historical mean P/BV of 0.87x, up from -1SD P/BV multiple of 0.6x. If market sentiment remains bullish, there is room for Broadway to further re-rate to 1x P/BV or above. Excluding an unusual occurrence such as GFC, Broadway has traded to a low of 0.8x P/BV and above 1x P/BV on average. Even at 1x P/BV, Broadway is still at a significant discount to Malaysia-based HDD component supplier JCY International which trades at over 3x P/BV.

Hence, we upgrade Broadway to BUY based on new TP of S$0.44, offering 31% price upside from current levels plus 6% dividend yield based on 2 S cts dividend. We estimate that Broadway will maintain final DPS of 1 Scts in FY11E.

Armstrong is set for post-flood rebound; deserves a re-rating too. Like Broadway, Armstrong is expected to incur a loss in 4Q11 as a result of the floods in Thailand. However, we estimate FY12F earnings will double as recovery gradually builds up momentum from 1Q12 onwards. Apart from the absence of impairment charges, we see earnings driven by recovery of HDD from late 1Q12 and steady growth of the automotive business, which contributes 34% of sales.

Armstrong currently trades at 1.2x FY12 P/BV, which is slightly below the past 5 year historical P/BV average of 1.6x. We believe a re-rating to historical mean valuation on FY12F BV is fair, now that the worst is over and outlook is improving gradually. Based on 1.6x P/BV, TP works out to S $0.40, which implies an upside of 40% from the current price. In the event that sentiment continues to power ahead of fundamentals, we believe the counter could potentially re-rate upwards and beyond +0.5 SD levels, or S$0.44 and above, as was the case in FY10.