KIM ENG RESEARCH, Jan 18
1QFY06 earnings slightly ahead of expectation: Sales grew 1.6 per cent
year-on-year to $120 million but net profit jumped 24.9 per cent to $14.4
million. We were expecting $13.9 million.
Operating profit would have grown a stronger 35 per cent if the $1.2 million
of doubtful debt and stock provisions were excluded. We understand that sales
were mainly driven by continued strength in Motorola and would be stronger if
not for the drag in display and DVD-R pick-up head businesses. Still, sales
were up 29 per cent quarter-on-quarter and net profit, 71 per cent.
Margin growth: Gross margin expanded 2 per cent point to 20.8 per cent
because of:
- more favourable product mix with more higher-value multi-layer count flex;
- turnaround of China operation and
- significant tax reduction from 24.9 per cent to 11.4 per cent as a result
of EDB's concession tax and tax-free benefits in China.
Q2 sequentially lower but still strong year-on-year: Despite the strong
shipment in Q1, MFS' orderbook of $166 million is just slightly below that of
Q4. Management has guided for positive momentum in Q2 although operating
results should be sequentially lower due to lengthy public holidays and
seasonality.
Maintain earnings estimate but reducing sales forecast: We have tweaked down
FY06 sales by 10 per cent but raised margin assumptions to reflect a
richer-than-expected product mix.
We understand that more than 50 per cent of current sales are from higher
margin new programmes. Admittedly, margins will fall as new products mature but
new projects are in the pipeline in the next few quarters and should offset
margin erosions.
Maintain Buy': On balance, we believe the company is still on track to meet
our FY06 earnings forecast of $51 million, or 45.9 per cent year-on-year
growth. Valuation is undemanding at 10.5x FY06 earnings with 5.5 per cent
dividend yield.
- BUY
