Thursday, May 5, 2011

Genetec ... May11

WILSON & YORK Research.

INITIATION REPORT
Genetec Technology Bhd (“GTB”) is mainly involved in the design and sales of industrial automation equipment. Prior to their latest acquisitions, the Hard Disk Drive (“HDD”) segment accounted for approximately 90% of total turnover. Recent corporate exercises will more than double current year revenue and profits. The company was formed in 1997 and converted to a public limited company in 2004, prior to listing in 2005.

INVESTMENT RISKS
Risks to our recommendation and target price include: i) softness in the demand for laptops and desktop computers, ii) higher metal prices, iii) higher interest rates, iv) reduced spending among Malaysia’s major trading partners due to higher energy and food prices, and v) industry consolidation in the global HDD sector; though consolidation sometimes leads to rebalancing among industry suppliers, the very large increase in Western Digital Corp’s global market share may augur very well for GTB’s future revenue prospects, as Western Digital Corp is a major client.

RECOMMENDATION
We maintain our BUY recommendation on Genetec Technology Bhd with a fair value estimate of MYR 0.38. Genetec’s shares are trading at the low end of its 5-year valuation bands. Looking ahead, average ROE is
likely to remain above 15%. Earnings multiples stand on an undemanding 6-7x FY Mar 11 profits, whilst P-BV is standing on 1.1x FY Mar 11 book value.

Compared to its peers in the sector, Genetec offers better margins and a higher ROE. Though global HDD demand growth is slowing down, Western Digital Corp will likely place larger orders with its suppliers, now that its own business has grown substantially. Prospective investors in GTB can obtain a stake in a company with i) a greatly enlarged base of assets and employees, ii) solid margins and iii) an attractive ROE - all for a
modest premium over book value. Current year and next year’s profits will be more than double the levels seen over 2007-2009, yet GTB’s share price has remained in a fairly tight trading channel of 22-28 sen for the past twelve months.

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