• 3QFY3/24 core net profit of RM30.4m was strong with 9M24F core net profit at 91%/92% of our/Bloomberg consensus FY24F estimates.

• Weakening US$ and slower recovery in front-end semiconductor spending, Airbus and Boeing production should see core profits taper off, in our view.

• Reiterate Hold with an unchanged GGM-based TP of RM4.18.

9MFY3/24 core EPS beat as US$/RM strength continues

• SAM Engineering & Equipment’s (SAMEE) 9MFY24 core net profit of RM85.3m (+16.7% yoy) was a strong beat at 90.9%/91.8% of ours/Bloomberg consensus’ estimates. 3QFY3/24 core EPS came in strong at RM30.4m (+46.6% yoy, -10.9% qoq), driven by an increase in revenue and better operating margins, which more than offset higher interest costs. While SAMEE is enjoying higher profits due to the strength of US$ against the RM, we reckon that it would likely be unsustainable heading into FY25F as we expect US$ to weaken against the RM.

Equipment and Aerospace recovery unlikely to accelerate

• Aerospace division revenue grew 14.5% yoy (-14.2% qoq) to RM99.8m in 3QFY24, due to higher sales of casing products, on the back of higher airplane deliveries by Airbus and Boeing yoy. The higher sales led to the Aerospace division recording a 3QFY24 PBT of RM1.6m (vs. RM1.6m loss in 3QFY23; -35.9% qoq). 3QFY24 equipment revenue rose 10.5% yoy (-7.9% qoq) due to a decrease in demand from customers, according to SAMEE. This coupled with higher sales of higher margin products, more than offset higher interest expenses, which led to equipment PBT rising 54.6% yoy (- 8.7% qoq) to RM38.1m.

• While the Equipment revenue was higher yoy, there was a qoq decline in Equipment revenue. We think this is an indication that the semiconductor downcycle has yet to show signs of strong recovery, with SAMEE indicating that fab utilisation was low (~70%) in 2HCY23 and that it may take time for fab utilisation to fully recover. This means that it might take time for its customers to consume excess equipment inventories before demand increases in tandem with our expectations of front-end semiconductor spending recovering in CY24F.

• Aerospace revenue was also higher yoy and lower qoq. While Airbus and Boeing production rates have increased compared to CY22, we think that SAMEE will struggle to further increase its revenues and utilisation rates due to a few reasons: i) the US Federal Aviation Administration announced on 24 Jan 2024 that it was capping any 737 MAX production rate increases until it is clear Boeing can ensure its quality control is fully compliant with regulations, and ii) both Boeing and Airbus are also struggling to further increase production rates of their planes as they struggle with global supply chain issues from their suppliers.

Reiterate Hold, with an unchanged TP of RM4.18

• We maintain our Hold call and GGM-based TP of RM4.18, as we think its mid-term recovery in ROE has been priced in by the market. At our RM4.18 TP, SAMEE’s implied FY3/26F P/E of 18x is similar to its 7-year mean. We await further details from SAMEE’s management at its briefing to be held on 26 Feb. Upside risks: faster recovery of Airbus and Boeing aircraft production rates, and lower-than-expected operating costs. Downside risks: slower recovery in Airbus and Boeing aircraft deliveries and higher- than-expected operating costs.

Source: CGS-CIMB Research - 27 Feb 2024