SAM Eng & Equipment: Overcoming Aerospace Challenges with Promising Growth Ahead

Date of Report
October 9, 2024

Broker
Maybank Investment Bank Berhad

Company Overview

SAM Engineering & Equipment (M) Bhd (SAMEE) is a contract manufacturer specializing in the production of equipment and aerospace products. SAMEE has been consistently recognized for its capabilities across both sectors, primarily working with major global aerospace clients such as Airbus and Boeing. Its main customers in the equipment segment are leading players in the semiconductor industry, referred to as Customer X and Y.

Financial Performance

• Revenue Growth: SAMEE’s revenue grew to MYR1,497 million in FY24, up 3.6% year-over-year. It is expected to grow by 10.9% in FY25, reaching MYR1,660 million, with further growth projected for FY26 and FY27.
• Profitability: The company’s EBITDA for FY24 was MYR247 million, with a slight decline expected in FY25 to MYR225 million due to supply chain and material quality issues. However, EBITDA is forecast to recover to MYR270 million in FY26 and MYR321 million in FY27.
• Net Profit: SAMEE’s FY24 core net profit was MYR108 million. It is projected to decline to MYR81 million in FY25, mainly due to temporary challenges in the aerospace sector. However, net profit is expected to rebound to MYR118 million in FY26 and MYR156 million in FY27, driven by increased production capacity and recovery in both the aerospace and semiconductor sectors.

Stock Performance

• Current Share Price: MYR4.19 (as of October 9, 2024)
• 12-Month Price Target: MYR5.71, representing a 37% upside.
• 52-Week High/Low: The stock has traded between MYR6.74 and MYR3.49 in the past year.
• Valuation: SAMEE is trading at a FY25E P/E of 35.1x, which is expected to decline to 24.0x in FY26 and 18.2x in FY27. Its core EPS growth is projected to recover by 46.4% in FY26 and 32.0% in FY27.

Recent Challenges and Expected Improvements

1. Aerospace Segment: SAMEE faced challenges in 1QFY25 due to raw material shortages and quality defects from suppliers, which led to halted deliveries and a 68% QoQ and 43% YoY decline in core net profit to MYR9.9 million. However, these issues are expected to be temporary, with normal operations anticipated in the next 1-2 quarters.
2. Global Aerospace Outlook: Despite current issues, the global aerospace sector’s growth outlook remains positive. Both Airbus and Boeing plan to increase their monthly production rates significantly by 2027. Airbus aims to ramp up A320neo production to 75 units per month by 2027, while Boeing targets 50 units for the 737 Max and 10 units for the 787 by 2026.
3. Semiconductor Sector: Recovery in the semiconductor sector has been slower than anticipated, affecting SAMEE’s RJ2 and BB1 plants. Despite this, the company has factored in gradual improvements in FY26-FY27.

ESG Initiatives

SAMEE has integrated an ESG framework aligned with the United Nations Sustainable Development Goals and the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. The company has launched several initiatives to reduce its environmental impact, including:

• A target to reduce GHG emissions intensity by 10% per year over the next three years.
• New water management, solar panel installation, and car-pooling initiatives to enhance operational sustainability.

Risk Factors

1. Sectoral Delays: Prolonged recovery in the semiconductor and aerospace industries could impact SAMEE’s future earnings and production.
2. Customer Dependence: A reduction in market share from key customers in the semiconductor sector, namely Customer X, could pose risks to revenue growth.
3. Production Challenges: Ongoing issues in material supply and production in both the aerospace and equipment segments present short-term risks to earnings.

Future Growth and Prospects

• SAMEE is seen as a long-term secular growth stock. The company is expected to benefit from recovery in both the semiconductor and aerospace industries.
• Management has guided that revenue is expected to double over the next five years, primarily driven by increases in equipment production and the normalization of aerospace deliveries. The expected CNP CAGR for FY24-27 is projected to be 13%.

Major Shareholders

• Temasek Holdings Pte Ltd: 55.2%
• EPF: 6.7%
• Norges Bank: 2.8%

Analyst Recommendation

Rating: Maintain BUY
New Target Price: MYR5.71
Despite the near-term challenges, the long-term growth prospects for SAMEE remain robust, underpinned by its strong market position in both the aerospace and semiconductor sectors.