FY13 earnings in line with expectation taken into account the one-off gain
Cooling Fan Module (CFM) remains growth driver delivering c.11% growth
Slower-than-expected margin improvement
Remain positive on strong financial position
Underlying sales increased by 1% excluding FX and non-core business impact. CFM grew c.11% (22% of sales), offsetting a 9% decline in IPG sales. Taking into account the one-off gain from the disposal of Saia-Burgess Control, net profit grew 2% to US$191m. Multiple factors affecting IPG. The weak IPG was affected by 1) lower demand in home entertainment products 2) Weak European economy and 3) Sacrificing sales for higher margin.
Operating margin decline despite improved GP margin. GP margin improved 0.7ppt to 28% for FY13, however operating margin declined from 10.1% in FY12 to 9.1% in FY13 caused by lower volumes, higher wages and increased in engineering costs. Our View DPS of HK11 cents, payout remains at 25%. We are slightly disappointed with the dividend payout. The company reported a FCF of c.160m in FY13 (FCF yield of 6.6%) as we expected the company to increase th e payout ratio from 25% in FY12 to 40% in FY13.
Lower commodity prices he lps margin improvement. We believe the recent drop in commodity prices and the launch of new products will continue to improve the company’s margins. We expect its GP margin to improve from 28% in FY13 to 28.5% in FY14.
Recovery takes time. Riding on its margin share gain and auto market recovery, we estimate a 14% growth for the CFM business remaining as the major driver. We expect gradual improvement for IPG business and we believe the exit from low margin products is consistent with the group’s long-term strategy. Overall we expect a 3% growth for FY14. To reflec t the slow recovery, we trimmed our FY14 earning estimates by 4% to US$199m.
Recommendation
Maintain BUY with TP of HK$6.5 (pre:$6.8). We maintain our long-term positive view. TP is cut to $6.5 to reflect slower earnings growth in the near term at 15x FY14 P/E, justified on the company’s market position, high FCF yield and strong balance sheet.