BSLCorp ... May11

Inet Research:-

1. 2QFY11 Results Review
 BSL’s revenue in 2QFY11 rose 24.7% to RM46.8 million from RM37.5 million in 2QFY10, mainly driven by growth in the precision metal stamping and automotive component manufacturing divisions.

 Growth in the precision metal stamping division was mainly due to higher orders for stamped metal parts for products such as LCD TVs while the automotive component manufacturing achieved higher sales due to contribution from a newly secured client in the quarter under review.

 Operating profit in 2QFY11 declined 62.3% y-o-y, but note that profit in 2QFY10 was boosted by some RM2.3 million gains from the disposal of two pieces of industrial land and building. Stripping out this disposal gain, the operating profit in 2QFY11rose slightly to RM1.3 million from RM1.2 million previously.

 Operation-wise, there were several factors that depressed core earnings in 2QFY11.
o In the precision metal stamping division, the higher number of public holidays in 2QFY11 (December 2010 – February 2011 period) resulted in higher wages, as production had to continue during public holiday to ensure timely delivery of orders.

o In the PCB assemble division, a complete audio set assembly operation commenced in end- November 2010. As such, there is set-up and additional operating cost. This has resulted in the division to have an operating loss of RM1.1 million in 2QFY11, compared with operating profit of RM0.7 million in the 1QFY11. The production line has also yet to achieve optimal efficiency level. BSL management expects this operation to breakeven in 3QFY11 and be in black in 4QFY11. Apart from this new contract, there was also less assembly work for other home appliances, as 2QFY10 is seasonally a quiet period.

 Despite the weak 2QFY11 results, BSL’s 1HFY11’s results are still commendable. BSL’s 1HFY11
revenue grew 21.2% y-o-y to RM96.6 million. Operating profit declined 7% to RM5.6 million while net
profit down slightly by 3.1% to RM3.5 million.

 BSL’s 1HFY11 results showed that it achieved high double digit topline growth. In terms of bottomline,
its profits from operations in 1HFY11 were comparable with the numbers in 1HFY10 that were boosted
by recognition of gains.

 Stripping out the gains in 1HFY10, its operating profit in 1HFY11 grew 51.4% y-o-y, as opposed to a
decline of 7%.

2. Key Investment Risks
 The earthquake and tsunami in Japan in early March could disrupt production of its Japanese customers,
which would in turn affect BSL’s orderbook.

 The demand for electrical and electronics products may be thwarted by rising commodity, fuel and food
prices that could reduce consumers’ spending power.

 While BSL has expanded its product range to cater for the poultry and automotive sectors, about 75% of
Group revenue is still derived from the electrical and electronics sector, whose recovery is susceptible to
the health of global economies that are currently under inflationary pressures.

3. Earnings Outlook
 Due to the recent natural disaster in Japan, BSL’s clients, mainly Japanese electronics companies such as
Panasonic, Sony and JVC are adjusting the production of their product models to ensure operations can
continue with minimal disruptions. As such, according to BSL management, their monthly orders in
terms of volume are still similar or slightly higher than the same period a year earlier. For now, BSL
management is still fairly confident that its production will not be adversely affected.

 The market for electronics products such as LCD TVs and Blu Ray players remains buoyant, and the
second half of the year is usually a peak period for BSL if its principal customers can avoid any
production disruptions as a result of the earthquake in Japan.

 Due to the commendable growth achieved in 1HFY11 (considering the recognition of gains in 1HFY10)
and expectation of better performance in the second half of the year being the busier period seasonally,
we are maintaining our forecast of net profit of RM9.7 million and RM10.8 million in FY11and FY12
respectively, from RM8.3 million in FY10. Our forecast is underpinned by growth in the precision
stamping division and other divisions remaining in the black, providing that there is no major disruption in
production.

4. Valuation
 Since our initiation report in early March, BSL is still trading at about 37 sen. This translates to historical
price to earnings ratio of 4.4 times based on earnings per share of 8.4 sen in FY10. Based on forecast EPS
of 9.9 sen and 11.1 sen in FY11 and FY12 respectively, it is trading at forward PE of 3.7 times and 3.3
times.

5. Recommendation
 We are maintaining a BUY call on BSL with a target price of 60 sen, imputing a PER of six times on
forecast EPS of 9.9 sen in FY11. The valuation implies an over 50% discount to the valuation of general
market, taking into consideration BSL’s small market capitalisation and lack of trading liquidity.

 The next two quarters will be crucial for BSL to demonstrate its ability to cooperate with its Japanese
clients to ensure continuous production. If this is the case, we expect BSL’s profitability to remain intact.