1Q03 earnings surge 115% to Bt273mn

METCO today reported 1Q03 earnings for the three-month period ending December 31 of Bt273mn. This was 115% higher than the same quarter a year ago and 37% higher than our forecast of Bt200mn. We have revised up our earnings forecast by 3% to Bt900mn this year. After falling 11% from its recent peak of Bt151 last month, METCO is trading on an extremely attractive 2003 PER of 3.3x and EV/EBITDA of 1.3x and offers a 48% upside to our fair value estimate of Bt200/share.

1Q03 sales surged 47% yoy to Bt3.57bn, beating our forecast of Bt3.14bn. The jump in revenues offset a decline in gross margins from 13.3% in 4Q02 to 11.6% due to lower prices for CD changers. Management is expecting a sharp rise in shipments of Canon digital cameras over the next few quarters after technical glitches slowed down production.

METCO clearly deserves a re-rating. The stock is still trading on similar multiples as when it was a low-tech, plastic and metal components supplier a few years ago. METCO has steadily climbed up the technology ladder and has transformed itself into a successful electronics contract assembler. With strong support from its parent company in Japan, METCO is also enjoying increasing demand for production outsourcing by leading Japanese consumer electronic companies.

1Q03 earnings are 37% above forecasts

METCO today reported 1Q03 earnings for the period ending December 31 of Bt273mn. This was 37% higher than our forecast of Bt200mn and 115% higher than the same period a year ago. Sales surged 47% yoy to Bt3.57bn, beating our forecast of Bt3.14bn. The jump in revenues offset a decline in gross margins from 13.3% in 4Q02 to 11.6% due to lower prices for CD changers. Meanwhile SG&A expenses as a portion of sales fell to 3.4% compared to 5% in 1Q02 and 4Q02.

Table 2: Quarterly income statement

Canon cameras contract to brighten profits picture this year

This year METCO’s earnings will be bolstered by its contract assembly of Canon digital cameras, which began at the Bangna plant in 4Q02. Camera shipments in 4Q02 and 1Q02 were about 15,000-20,000 units per month, well below full capacity of 100,000. METCO and Canon have been working hard to solve some technical glitches and management is forecasting a strong pick-up in shipments in 2Q03.

Table 3: Earning revision in 2003-2004

Following METCO’s better-than-expected results, we have revised up our sales forecasts for 2003 and 2004 by just over 4% per annum and our earnings forecasts by 2.7% and 0.9% respectively. However, we have lowered our estimate for gross margins and overheads, to reflect pricing pressures on CD changers and other products. METCO should enjoy more stable operating margins in 2003-2004 than in the previous two years when the company was heavily dependent on CD changer sales.

Figure 1: Quarterly operating margins during 2000-2002

Free cash flow expected to reach Bt1.13bn in 2003

Despite its strong growth, METCO’s working capital requirements fell sharply to just Bt157mn in 1Q03. METCO has been able to more efficiently manage its working capital needs following its transformation into an Electronic Manufacturing Services (EMS) producer over the last two years. The company has low receivables and inventory risks as all of its clients are well-known Japanese multinationals such as Panasonic, Canon and Sharp.

Table 4: Brief financial ratios

METCO repaid loans worth US$5mn in 1Q03, lowering its debt from Bt703mn last September to Bt432mn at the end of December. Its net cash position, meanwhile, doubled from Bt532mn to Bt1.07bn during the same period. METCO generated free cash flow of Bt378mn in 1Q03, prompting us to raise our free cash flow forecast for this year by Bt180mn to Bt1.13 bn.

We are forecasting Bt300mn capex this year including Bt97mn that was expensed in 1Q03. The company is continuing to upgrade its technology capabilities in order to provide more sophisticated contract manufacturing services in the future.