Case Study of Sam Engineering & Equipment (M) Berhad (9822)

By Stella Goh – Market Data Analyst | 19 December 2019


Sam Engineering & Equipment (M) Berhad is an established holding and provision of corporate management services company founded in the Year 1948, which primarily involved as a key player in precision machining, equipment integration and automation solutions for aerospace and equipment industries. 

SAM was listed on ACE Market in 1995 and successfully transformed into Main Market of Bursa Malaysia in 1999. The group is a subsidiary of Singapore Aerospace Manufacturing Pte Ltd (SAM), a leading manufacturer of critical aero-engine components for the international aerospace market. Their key customers include Boeing, GE Aircraft Engines, GKN Aerospace Services, Goodrich and major aerospace original equipment manufacturers.  

SAM are supplied from their facilities in China, Germany, Malaysia, Singapore and Thailand to customers worldwide. 

Business Model 

Sam Engineering & Equipment (M) Berhad principally involved in the business segments such as Aerospace, Equipment Manufacturing and Precision Engineering. 

The Aerospace segment provides end-to-end manufacturing solutions on critical engine parts and other related equipment parts of complex geometry that are made by aluminium alloys, and hard, tough materials such as stainless steels, titanium and nickel-based alloys.  

While for the Equipment Manufacturing segment, it provides system integration services and unique engineering solutions from collaborative design and development to multinational companies in Hard Drive, Solar, Semiconductor and LED industries which are supported by their in-house machining, sheet metal fabrication and surface treatment processes.  

While for Precision Engineering segment, it provides end-to-end precision manufacturing solutions on engineering and high-precision tooling, including large format computer numerical control (CNC) machining parts.

Financial Review 

Based on the past 5 financial years of revenue chart above, the group’s revenue grew from RM451.5 million in FY2015 to RM620.1 million in FY2016 equivalents to 37.33% and started to decline to RM537.4 million in FY2017. When it comes to FY2019, SAM successfully rebound back from RM537.4 million in FY2017 to RM755 million equivalents to 21.97%. On a CAGR basis, SAM has grown 10.77% based on 5 years. The increase in revenue was mainly due to the growth momentum in both Aerospace and Equipment Businesses which constituted approximately 60.87% and 39.13% of total group’s revenue respectively.  

Sam Engineering & Equipment (M) Berhad has successfully achieved a tremendous high record of gross profit by 11.65% from RM102.6 million in FY2018 to RM114.6 million in FY2019. Based on the past 5 years of CAGR basis, the gross profit has grown 18.74%. The ramp-up mainly drove the growth of gross profit in production for the new Airbus A320neo and Boeing 737max aircraft engine cases and stronger demand in semiconductor & data storage devices industry in FY2019. 

The Profit After Tax (PAT) of SAM rose 24.79% from RM62.9 million in FY2018 to a new high of RM78.5 million in FY2019. On a CAGR basis, the Profit After Tax (PAT) grew by 22.63% was in line with the growth of revenue and gross profit.

Cash Flow Statement 

The group have generated net cash from operating activities of RM32.6 million in FY2019 as compared to RM64.8 million in the previous year. The decrease in net cash from operating activities was mainly due to the increase in working capital requirements for the group’s on-going operations. Even though the cash flow is lesser in FY2019, the company still have enough cash used for business expansion. 

The net cash from investing activities in FY2019 is (-RM88.2 million) was mainly due to purchase of plant and equipment (RM91.3 million) and purchase of intangible assets (RM11.3 million), partially offset by proceeds from sales of land and building of RM14.3 million. The negative cash flow indicates that the firm is investing more in its business to grow. 

The net cash from financing activities in FY2019 has obtained a positive figure of RM47.1 million was mainly attributed to the drawdown of term loans (RM19.8 million) and drawdown of revolving credit (RM67.9 million). SAM had also paid for the dividends, interest and foreign currency loan with a total amounting to RM40.6 million.  

Based on liquidity ratio calculation, SAM has a current ratio of 2.1373 times in FY2019 compared to 2.1379 times in FY2018 indicates that the company do not face any liquidity issue as they are capable of paying back its liabilities on due by using current assets such as inventories, contract assets, trade & other receivables, derivatives financial assets, current tax assets, cash and bank balances amounted to RM470.5 million.  

Prospect & Challenges 

Sam Engineering & Equipment (M) Berhad has achieved an outstanding order book amounted to RM3.1 billion for engine casing and small to large aerostructure. (Source: The Star, 22Feb2019).  

SAM has launched the latest RM140 million manufacturing plant in Penang Science order book Bukit Minyak and seeks strong prospect for the aerospace industry as Malaysia aimed to become a leading aerospace nation in Southeast Asia by the Year 2030. (Source: MalayMail, 21Feb2019). The new 145,000 sq. ft. The plant is equipped with state-of-the-art precision machinery and the group tends to employ 200 highly skilled workers when fully ramped-up. The group will spend about RM1.3 million annually for their employees to overseas for on-the-job training and for engineering collaborations with their counterparts in Singapore and China to increase their job performance. (Source: Malaymail, 21Feb2019).  

Based in the Forbes Report in December 2018, the Solid-State Drive (SSD) will gradually replace the Hard Disk Drive (HDD) for many current storage applications. While this may be the case, the demand for HDD will remain strong due to more cost-effective devices for large capacity storage. SAM’s storage device business is well balanced as they supply equipment for both SSD and HDD applications. Regardless of whether the SSD will overtake the HDD as future storage technology, the groups are confident of riding the wave of the industry. (Source: Annual Report 2018).  

Rating System 

Return on Equity (ROE) = Average 

Revenue [5 years CAGR] = Average 

Net Earnings [5 years CAGR] = Good 

Basic Earnings per Share [5 years CAGR] = Good 

Interest Coverage = Good 

My Insight 

Based on my calculation on Discounted Earnings Model, Sam Engineering & Equipment (M) Berhad has a fair value of RM8.877. The current market value of SAM is RM7.98 which is in the range of fair value. (Based on 16Dec2019). SAM has a beta of 0.624 (500days) indicates that the company is volatile than the current market, which means the investors/traders is not actively trading in this stock, they may face lower risk. Based on my computation of Compound Annual Growth Rate (CAGR), SAM has an expected market return of 6%. 

In conclusion, Sam Engineering & Equipment (M) Berhad has achieved an outstanding performance in FY2019 as the revenue, gross profit and net profit after tax have increased based on years-on-years (y-o-y) basis as the production for new Airbus A320neo and Boeing 737max keep on increasing and higher demand for semiconductor & data storage industry. However, an investor or trader must cautious that this company is having limited growth based on its intrinsic value have calculated.

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