Eng Teknologi Bhd (March 18, RM2.69)
Maintain buy with higher fair value of RM3.25: Engtek’s share price has appreciated almost 50% since the record sales guidance given by the management in the analysts’ meeting on Feb 25, 2009.

However, the company’s FY10 PER (price-earnings ratio) is still not highly priced even at the current share price. We are raising Engtek’s fair value to RM3.25 by pegging a 7.5 times multiple to FY10 PER which is its historical 11-year average PER.

Although Engtek’s share price has already rallied about 450% since the low of about 50 sen in March last year, the company’s FY10 PER is still attractively priced as its earnings have recovered fast enough from the world’s economic recession, especially the 4QFY09 results which saw both its revenue and net profit increase by 17% and 648% year-on-year (y-o-y), respectively.

Within a short period of two weeks, Engtek’s share price has appreciated by about 50%. It could be partially due to the record sales guidance given by the Engtek’s management in the FY09 analysts briefing.

However, the main factor could be Engtek’s consistently steep discounted valuation compared to the other hard disk drive (HDD) components manufacturers namely Notion VTec and JCY.

The lower valuation has become even more obvious after the listing of JCY in February this year. While both derive more than 50% sales from Western Digital, Engtek was still trading at more than 50% discount compared to JCY in February.

We maintain our FY10 net profit forecasts and Engtek’s share price is therefore appreciating towards Its historical 11-year average PER of 7.1 times, closing down its valuation gap compared to Notion VTec and JCY.

However, we would still apply a slight discount to Engtek as compared to the other two listed HDD manufacturers in Malaysia. This is because Notion VTec commanded a much higher PBT (profit before tax) margin of 25% in FY09 as compared to Engtek’s 4QFY09 PBT margin of 16%.

Notion VTec has also proved its ability to maintain at least 25% PBT margin over the last six years while Engtek’s margins fluctuated widely during the same period of time.

We value Notion VTec at nine times FY10 PER. As for JCY, it is much larger as compared to Engtek and according to TrendFocus, it is a Tier-1 or Tier-2 supplier of a number of components to Western Digital and Seagate and this is unmatched by Engtek.

Nonetheless, Engtek can still be worth more. If the optimism on the broader equity market continues to remain high, that would allow enough time for Engtek to appreciate towards its historical 11-year average PER of 7.1 times and narrow the valuation gap to JCY and Notion.

Engtek’s FY10 PER is still attractively priced and pegging a fair 7.5 times FY10 PER, Engtek’s fair value is raised to RM3.25. — OSK Research, March 18

This article appeared in The Edge Financial Daily, March 19, 2010.