Impressive 77% yoy increase in 4Q02 earnings

Thai Storage Battery (BAT-3K) reported very strong 4Q02 results with net profit rising 122% qoq and 77% yoy to Bt69mn (EPS of Bt3.45). This exceeded our previous estimate of Bt62mn. The major factors driving 4Q02 earnings were 1) strong domestic and export demand, particularly for BAT-3K's new maintenance-free batteries and 2) lower raw material costs following the cut on import duties on lead from 10% to 1%. Due to the strong 4Q02 results, BAT-3K was able to post full-year 2002 earnings of Bt155mn (EPS of Bt7.76), up 52.9%.

We are quite confident of BAT-3K's future earnings prospects with orders currently exceeding the company's manufacturing capacity, especially for maintenance-free batteries. To serve this growing demand, the company is in the process of spending Bt50mn to increase capacity from 150,000 units per month to 170,000 units. Our forecasts, however, are quite conservative with sales and earnings growth projected at 8% and 16.5%, respectively.

Given BAT-3K's improving earnings and strong financial position, we believe the company can afford to step up its dividend pay out from 2003 earnings to Bt2.7 per share, up from the Bt2.25 per share to be paid this year.

BAT-3K is trading on a relatively cheap PER of 4.46x, EV/EBITDA 2.52x, P/BV 0.64x and dividend yield of around 6-8%. We are maintaining our target price of Bt50/share, which would still put the stock on an undemanding PER slightly below 6x.

Although we have been quite bullish on BAT-3K's earnings prospects, we had previously rated BAT-3K as a LONG-TERM BUY given its limited trading volume. However, with the company's strong earnings performance, trading activity has recently improved allowing us to upgrade our rating on the stock to a BUY.

BAT-3K's income statement (Mn Bt)

Note: COGs does not include Depreciation and Amortisation

• BAT-3K's 4Q02's sales expanded by 42% qoq and 12.9% yoy to Bt557mn. This was due to 1) traditional high fourth-quarter season for battery sales; 2) strong demand for BAT-3K's new maintenance-free batteries; 3) expanded production capacity for high margin products, such as solar, EV, golf cart and forklift batteries; and, 4) successful opening of new export markets in Africa, America, Indochina and the Caribbean. Previously, the bulk of BAT-3K's exports were to the Middle East.

BAT-3K’s quarterly sales

• Gross margin in 4Q02 jumped to 31.2% from around 27.7% in the previous quarter and last year. This was due to due to the success of its high-margin maintenance free batteries, as well as lower raw material prices with the reduction in the import duty on lead from 10% to 1% at the end of 2Q02. Pure lead accounts for 27% of the company’s total raw material costs.

• Selling and administration expenses of Bt85.6mn in 4Q02 rose 27.3% from the previous quarter and 14.6% from the previous year, roughly in line with sales growth. Meanwhile, interest expenses fell to only Bt3.5mn, as BAT-3K continues to use strong cash flow from operations to repay debt. Net debt fell to only Bt36mn at the end of December, compared to Bt322mn in the year 2001.

• Based on our DCF model, BAT-3K's shares are worth Bt58 apiece. We don't believe the market yet reflects the company's strong recovery in earnings. Even if we adopt a conservative valuation of 6x prospective earnings, or Bt50 per share, the stock still has an upside potential of 24%.