• Sales on track but earnings missed expectations; 9MFY11 met only 62% of
  our and consensus FY11F
• EBITDA margin of 12% has improved but still off 1H’s 14% and our estimate
  of 15%
• Margin expansion needs more time to unfold; potential supply chain
  disruption adds uncertainty
• FY11F/12F cut 21%/15%, downgrade to Hold on lower TP of S$1.20

3Q11 fell short of expectations.
Core profit, excluding forex losses, was US$9m (+41% y-o-y, -25% q-o-q), below our US$13.7m estimate. This was due to lower than expected EBITDA margin of 12%, which improved over 9.8% in 3Q10 but was 2%pts lower than 1H average of 14% and our forecast of 15%. Amtek attributed the lower margins to lack of economies of scale and higher overtime costs incurred in the seasonally slower quarter. 9MFY11 earnings met only 62% of our and consensus forecast of US$57m. Sales grew 6% y-o-y to US$164.6m, in line with our forecast and driven by Auto (+20%) and Electrical/Electronics (+36%) offset by Mass Storage (-16%).

Margin expansion taking longer than expected.
Other than persistent weakness in Mass Storage and Casings/Enclosures, we expect stronger run-rate in the quarters ahead as Amtek continues to ramp up for Autoliv, Thyssen Krupp and Schneider. However, in view of rising labour costs and low operating leverage for new programmes, margin expansion is likely to be slower than we had previously expected. Compounding the matter is uncertainty from the potential supply chain disruption post Japan crisis.

FY11/12F cut by 15-21%; downgrade to Hold, S$1.20 TP.
Our revised earnings have factored in 5% lower sales, 1.2-1.3%pts cut in gross margin and 1% lower tax rate. Accordingly, our TP is revised to S$1.20 based on sector average of 9x FY12 earnings. Downgrade to Hold.