Maximum bullish on SAT, my earnings model and more.
My earnings and so stock price projection/outlook on SAT, and why the more I think about it, the more I am rather very bullish on this newer selection.
In my just previous to this member article I review some macro reasons why the global automobile part sector likely has a bright future. This as global automotive companies are keeping up with customer demands for faster innovation and greater customization, which means ever more out-sourcing with allot more innovation from ouside their corporate walls.
As I stated already, SAT has firmly announced that it does not plan a capital increase this year as the current stock market price is far too low. The company's finance director notes SAT has ample borrowing capacity along with some 800+ million in annual cash flow from operations (CFO) and so will not have to and won't increase its capital to finance this massive expansion (1 to 1.5 Bill. Baht investment) for now, which would then see the companies' revenues soar by just about 30-40% over the next 3 years.
As I wrote in my company visit report to you, I see SAT earnings per share at some 2.75 Baht per share by year end 2009, as production of its new products will start in late 2008 and will reach 80% of total capacity by mid 2009. While SAT expected to hear about this contract from its major customer by end of February, after speaking with them again last week, the company remains confident that by end of March the deal should be clinched. SAT's continues to says its 80% confident in obtaining this massive contract -and as stated. Other analysts as well as myself think that they will.
As I wrote to you on February 25, and it is worth here repeating: "If SAT does not get this large contract it is confident it can & will use this land and new factory to produce other car & pick-up truck parts. The company feels its revenues can grow 10 to 12% without this large new contract. In that case the stock might sell off a bit, but I think this possible bad news is largely discounted already. My view is that the upside in its stock price is much higher then the potential downside, as this stock is already near its long term low." I stated the stock price probably discounts no news already, as its shares are still trading off its all time low, or around only half the price of its highest level reached last year.
My own projected earnings model for the next 3 years hence looks as follows, with SAT's stock now at a current price of 10.10.
EPS for year 2007 is 1.65 or for a current year 2007 p/e of : 6.12
EPS for year 2008 is 1.90 or for a forward p/e for year 2008 of : 5.31
EPS for year 2009 is 2.75 or for a forward p/e for year 2009 of : 3.67
SAT's p/e is so recovering from an all time low of only around 6, as compared to around 10, since listing in early 2005. The average p/e for the Auto and Parts sector (for year 2007), on the SET is currently 8.6. (Source is Tisco's "Market Snapshots", as of March 8 '07)
The expected dividend yield, assuming a 30% pay-out policy and a stock price of 10.10, is as follows: 5% for year 2007, 5.6% for year 2008 and 8.1% for year 2009. As compared to the average dividend yield for the automotive sector which is 3.4% for year 2007 and 3.9%, for year 2008. (Source Tisco's "Market Snapshots" as of March 8 '07).
As members can readily see SAT' average dividend yield is almost 50% higher then its own sector! And SAT's ROE and profit margins are the highest in the sector. According to Tisco's "Market Snapshots" as of March 8 '07, SAT has the 7th lowest expected 2007 p/e of any SET stock, and yet by far, the highest ROE of any stock in its sector! Highest ROE, among the highest dividend and yet lowest P/E., it just does not make sense.
Assuming that in year 2008 the company probably does make a capital increase and so dilutes its outstanding earnings per share by say 25%, the EPS for year 2008 would drop to 1.42 and EPS for year 2009 would drop to 2.06, or for a p/e of 7.1 and 5.95 respectively. I realize that the earnings estimate for year 2009 seems rather ambitious but I assume, I think reasonably so, that during this period there will be at least one boom year for automobile/pick up truck production and/or a time when the SET index will turn bullish.
This is how I so come-up with medium term stock price objective of 30 over the next 2-3 years. (See more on this below). After I did my own earnings projections, I looked at three different brokerage reports which just recently assigned SAT a buy recommendation on their own. Namely, Bualuang Securities, Tisco, and Finansa. The average EPS estimates over the next two years of these three were: Year: 2007 2008 1.66 1.89 No EPS estimates are shown for year 2009, which however I duly note will be SAT's largest earnings increase as only by then full 80% of the new higher margin product capacity will have come on stream. (Note how close my own estimates are to these 3 brokers, which I tabulated before looking at these reports).
Realize that if SAT's sock price moves upwards before the capital increase is implemented, interest expenses would surely drop as the company would then get a sizeable increase in new equity. Realize as well that the company has stated with no hesitation, that it can implement the large capital investment needed for this project without increasing its share capital due to ample borrowing power besides huge free cash flow. SAT has a good balance sheet and this improved lately. Its net gearing ratio declined to 0.93x from 1.0x at year end 2005.
The low net gearing leaves ample room for a debt increase to finance new projects. I think my earnings projection for year 2009 is on the realistic side as the new project is expected to increase SAT's total revenues by 33% within 2-3 years and the margin on the new product will be higher, as it is an added value product. Hence probably 2 billion Baht, of the company's total 6 billion in revenue (by year end 2009), will be from this new higher margin product. Since the beginning of this year, SAT's average daily trading volume is over 8.5 million Baht.
With 300 million shares outstanding, some 63% of which are fee float, SAT's stock can hardly be called a small cap. Hence anyway you look at it, I find the p/e assigned to SAT way to modest. SAT has the 3rd largest market cap in the Automotive sector at a respectable 3 Billion Baht. There are no warrants outstanding. My view is that once the new mega order has been announced and signed the p/e should be at least the average p/e of the sector or say 8.5. At 8.5 times my estimate of 1.66 the stock price would be 14.11.
But since SAT has higher margins and higher ROE then its competitors besides a higher average growth rate going forward, I would think a p/e of 10 would be warranted, and so I come-up with a short term price objective for of 16 on SAT, and this is my near term objective say by mid year 2007. As the market realizes that SAT can earn well over 2 Baht per share in 2008 and near 3 Baht per share in 2009, and assuming the Thai stock market can expand on its horrific current low p/e valuation which is near a 30% discount to the region, I come with a stock price of 30 Baht per share, by say mid or early into year 2009.
Best Regards,
Paul A. Renaud.
PS. According to Tisco, the average Beta of SAT shares over the past 3 years was a low 0.62 as compared to the SET benchmark index's 1.0. Hence, historically according to Tisco SAT's shares have been less volatile the SET index. SAT's traded as high as 20 Baht per share and as low as 7.85 over the past 52 weeks. However I much question this calculation by this broker, as the stock has only been trading since January 2005, and has at first nicely outperformed the SET index, only to recently well under perform. While this is not serious, it shows again that with Thai broker reports it pays to take some assumptions/calculations with a grain of salt. Surely SAT shares have recently outperformed the SET increasing some 5-6 % vs. the SET's drop of some 4% over the past month. I have clearly noted since my company visit in mid February to favor this selection.
