Proxy to global aviation demand recovery
? We initiate coverage on SAMEE with an Add rating and a RM3.80 TP, based
on 18x CY23F P/E, a 10% discount to its 3-year historical mean P/E.
? The group is poised to benefit from: 1) recovery in global aviation demand, 2)
capacity spending in semiconductor industry, and 3) new capacity expansion.
? We expect SAMEE to register a 3-year core EPS CAGR of 24% (FY22-25F).
A contract manufacturer with dual exposure in aero and equipment
SAM Engineering & Equipment (SAMEE) is a 71.5%-owned subsidiary of Singapore
Aerospace Manufacturing (SAM) group, which in turn is a unit of Singapore’s sovereign
wealth fund Temasek. In FY3/22, SAMEE derived 78% of its revenue from the equipment
division, which serves the front-end and back-end semiconductor industry and the data
storage market. Meanwhile the remaining 22% came from the aerospace division. SAMEE
provides end-to-end manufacturing solutions for critical aircraft engine parts and
aerospace-related equipment parts, like engine cases, nacelle beam and prismatic parts.
Riding on global aviation demand recovery
We see stronger recovery prospects for SAMEE’s aerospace division beyond CY22F,
driven by the robust demand outlook for commercial aircraft production. Aviation industry
market research group Forecast International Inc projects total commercial aircraft
production by Airbus and Boeing combined to grow by 32%/26%/11% in 2022F/23F/24F.
Meanwhile, The International Air Transport Association (IATA) expects overall traveller
numbers to reach 4.0bn in 2024F, exceeding pre-Covid-19 levels. Hence, we expect
airlines to step up their reinvestment cycle in new capacity to capture market share, which
should bode well for aircraft manufacturers, as well as suppliers (such as SAMEE).
Projecting a healthy 24% core net profit CAGR in FY3/22-25F
We project a 3-year core EPS CAGR of 24% (FY3/22-25F), driven by: 1) the recovery in
global aviation demand and a pick-up in fan cases and nacelles production volume, 2)
higher fab spending globally and commercialisation of newer products portfolio for its
equipment customers, and 3) an additional 18% production floor area expansion with the
opening of its second phase expansion in the Thailand plant by CY23F.
Initiate with an Add rating and a RM3.80 target price
We initiate coverage on SAMEE with an Add rating and RM3.80 target price, based on 18x
CY23F P/E, a 10% discount to its 3-year mean P/E of 20x due to weak sentiment in the
tech sector. The stock has fallen by 46% YTD, wider than the 35% YTD decline in Bursa
Malaysia Technology Index. We believe the stock offers compelling value on the back of
robust earnings growth prospects, driven by aviation demand recovery and new capacity
expansion in Thailand. The stock also trades at 0.7x FY23F PEG ratio. A stronger recovery
in aerospace demand and higher fab spending are potential catalysts, while delays in air
travel recovery due to a new wave of Covid-19 infections and overcapacity in the
semiconductor market are potential downside risks to our Add call.