KUALA LUMPUR: Sam Engineering and Equipment
(M) Bhd’s return on equity (ROE) may see a slight dilution following its recent rights issuance, says CGS-CIMB Research.
The rights issue was done to fund the acquisition of the entire stake in Aviatron (M) Sdn Bhd for RM203mil in cash from its major shareholder Singapore Aerospace Manufacturing Pte Ltd.
The acquisition is earnings dilutive for the group in the short term, but will add to growth in the longer term, the research house said.
“We expect the acquisition and rights issue to be earnings-dilutive for SAM Engineering with short-term synergies limited to administrative synergies.
“We believe the acquisition will reduce its ROE to 8.5% in the forecast financial year 2024 (FY24), before it gradually recovers to 11.7% by FY26,” said CGS-CIMB Research.
The company’s ROE moving forward will be supported by the continued recovery of Boeing and Airbus production rates and deliveries and recovery in the global semiconductor industry in FY26.
SAM Engineering’s earnings moving forward will be supported by the acquisition since Aviatron is the sole contract manufacturer for engine nacelle beams for Airbus 220, Airbus 350 and Boeing 787 aircraft, the research house said.
It noted that SAM Engineering manufactures the same component for the Airbus 320neo aircraft type only, which allows the company to grow its market share and expertise in other models.
“We reiterate a ‘hold’ rating on SAM Engineering, with a lower Gordon Growth Model-based target price of RM4.18, as we think its midterm recovery in ROE has been priced in by the market,” the research house said.
“Our ex-rights target price of RM4.06 represents a slight upside to the ex-rights share price of RM3.92 as at the closing on Jan 12.
“Upsides include a faster recovery of Airbus and Boeing aircraft production rates and lower-than-expected operating costs,” it said.
The research house added that downside risks include a slower recovery in Airbus and Boeing aircraft deliveries and higher-than-expected operating costs.
