SAM to benefit from semiconductor play

PETALING JAYA: The future growth of Sam Engineering & Equipment (M) Bhd would be led by its equipment division, a research house says, thanks to the company’s exposure to the front-end semiconductor industry.

CGS-CIMB Research said SAM’s new capacity expansion of its equipment division indicates that it will be the future growth engine.

The capacity expansion was achieved following the acquisition of the Chon Buri production facility and the second phase expansion at the Rojana factories.

Both facilities are expected to begin operations by the second half of 2023.

Despite the positive developments, CGS-CIMB Research warned that SAM’s near-term profits are under pressure from the semiconductor downturn, with recovery only expected in the financial year ending March 31, 2025 (FY25).

It is noteworthy that the company has prioritised the growth of its aerospace division since 2008.

“Should there be an unwinding of the aerospace business, we estimate that it could lead to a return to recurring return of equity of 18%, which would take our target valuation to RM6.25 per share,” according to CGS-CIMB Research.

In a note yesterday, CGS-CIMB Research has upgraded its call on SAM to “hold” from “reduce” previously, with a higher target price of RM4.95 per share.

“We think mid-term recovery and growth are largely priced in at current valuations,” CGS-CIMB Research said.

SAM’s revenue is expected to decline by 8% in the ongoing FY24 before rebounding by 27% and 24% in FY25 and FY26 respectively.

This is mainly due to a 16% decline in equipment division sales, in line with softening global fab equipment spending for front-end facilities in 2023, before recovering and later growing in tandem with the overall semiconductor industry in 2024 to 2025.

Meanwhile, CGS-CIMB Research estimates the aerospace division’s revenue to grow by 20% compound annual growth rate in FY24 to FY26. This would be supported by the continued recovery of Boeing and Airbus production rates and deliveries.“We see SAM’s gross profit margins remaining at 11.6% in FY24, due to ongoing component and material shortages, as well as inflationary pressures and higher staff costs.

“Gross margins should then recover to 12% and 12.5% in FY25 and FY26 respectively, in our view, as operating conditions normalise across its business units.

“This could lead to core earnings per share dipping 8% in FY24, in line with weak equipment demand, startup costs in Thailand, and higher utilities and labour costs, before growing 38% and 35% in FY25 and FY26 respectively, based on our estimates,” CGS-CIMB Research said.