Thursday, June 02, 2016

SAM: A Growth Stock


Sam Engineering & Equipment (M) Bhd ('SAM') is involved in 3 businesses: aerospace, equipment manufacturing & precision engineering. Aerospace is the largest business segment, accounting for 53-54% of its revenue & PBT (based on latest YTD results).

SAM's 3 main businesses

Latest Development

Two days ago, Singapore Aerospace Manufacturing Pte Ltd ("SAM Singapore") announced that it had converted 83.03 million ICULs into 39.54 million shares at conversion rate of 2.1 ICULS to 1 share. This exercise bumped up its shareholding from 54.46% to 70.12%. The rationale behind the exercise was to increase its income from its investment from an interest income of RM3.32 million (from the converted block of 83.03 million ICULs at a coupon rate of 4% p.a.) to RM15.82 million (from the newly issued block of 39.54 million shares at an assumed dividend of 40 sen p.s.). In addition to the higher income, SAM Singapore's decision to convert the ICULs can be taken as a vote of confidence in SAM's business prospects going forward.

SAM Singapore obtained a block of 101.25 million ICULs plus cash of RM33.75 million as full consideration for the sale of its entire stake in Avitron Private Limited ('Avitron') to SAM in 2012. Avitron is the company that carries on the aerospace business in the group.

Recent Financial Performance

SAM's top-line and bottom-line have risen steadily in the past 7-8 quarters. Its quarterly net profit is around RM15-20 million while revenue is around RM140-170 million. Profit margin is pretty decent at 10-12%.

Table: SAM's last 8 quarters' P&L

Chart 1: SAM's last 22 quarters' P&L

Diagram: SAM's Segmental Results for 9-month ended 2016, 2015, 2014 & 2013

Financial Position

SAM's financial position as at 31/3/2016 is deemed healthy with current ratio at 4.1x and total liabilities to equity of 0.3x.


SAM (closed at RM6.64 yesterday) is now trading at a PER of 13.2x (based on last 4 quarters' adjusted EPS of 50.13 sen). Based on CAGR of 50% over the past 2 years, PEG ratio is still comfortably below 1x. As such, SAM valuation is deemed 'reasonable' for a growth stock.

Technical Outlook

SAM has been rising in a gradual uptrend. Currently, it is in a consolidation phase and it is expected to find support at the 10-month SMA line at RM6.60. In the past 2 consolidation phases, the share price dropped below the 40-month EMA line before recovery set in. If the same pattern repeats, then the share price may go as low as RM4.50-5.00 (see the pink area). Arguing against such a deep retracement is the fact that SAM's profits have been rising in the past 7-8 quarters; something which was nor present during the last 2 consolidation phases. Thus I believe there is a good chance that the share price may be well-supported between the 10-month SMA line and the psychological level of RM6.00.

Chart 2: SAM's monthly chart as at June 1, 2016 (Source: ShareInvestor)


Based on good financial performance & position and attractive valuation, SAM is a good stock for long-term investment.

In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, SAM.


luckystock2 said...

Hi Alex ,
Can you comment on GCB latest quarter financial result ?

ronnie said...

Hi Alex,

The reasons for investing in SAM are as follows:

(1) SAM is owned (70%) and controlled by Temasek.

(2) SAM is trading at 13x earnings via-a-vis PEG of 0.85.

(3) It's business of manufacturing aircraft components provides the company with a wide moat as the quality of products are very high. These aircraft parts have to be of the highest quality. Berkshire Hathaway bought over Precision Castparts recently. Precision is in the same business as SAM.

(4) SAM has a RM3.5bil order book (as per article in Edge Daily). This should place SAM on a sound footing.

Alex Lu said...

Hi ronnie

Thank you for the input on this stock.