We have initiated coverage on PCSGH with a BUY call and a YE14 target price of of Bt10.60, pegged to an FY14 PER of 12x (0.5 SD above the long-term Automotive sector mean of at 10x). There is 23% upside to our target from the IPO price of Bt8.60. We believe PCSGH deserves a premium over its peers for the following reasons: 1) it has the fattest GM in the Automotive sector, 2) a low D/E ratio, 3) the highest ROE of comparable peers, 4) scope for upside from business expansion and 5) the firm is technologically ahead of the curve (see our IPO report, December 26, 2013).
The fattest GM of any SET-listed auto-parts maker
PCSGH has been making first-tier auto-parts for more than a decade. Its production is concentrated in the powertrain system—high-value component parts for engines, transmissions and final drives. Thus, the firm had the fattest GM of any comparable peer of 35.2% in FY12 and 29.7% in FY13. The mean GM for our existing coverage (STANLY, SAT and AH) was 12% in FY12 and 15% in FY13.
Financially healthy with a high ROE and a low D/E ratio
Despite capital-raising of Bt3.3bn during March 5-7, 2014 we forecast a high ROE of 37.4% in FY14. The D/E ratio should drop to 0.2x at YE14 from 2.3x at YE13, pushed down by debt repayments, enabled in part by the capital injection.
Scope for upside from business expansion
The IPO strengthens PCSGH’s financial position, which endows the firm with the financial capacity for both organic and in-organic business expansion. In addition to its existing customers, the firm could start supplying other car makers, both in Thailand and abroad, in order to diversify country risk.
Technologically ahead of the curve
PCSGH works on an ongoing basis to update and upgrade its production processes and technology—especially with regard to hot forging and die-casting—in order to be able to make lighter, stronger vehicle parts. Its production quality already complies with European VI emission standards (Euro VI) for diesel commercial vehicles, which puts the firm ahead of most other Thai auto-parts makers and enables it to supply components for the manufacture of automobiles for export to the EU and other jurisdictions with strict standards.