Broadway has appreciated 26% from S$0.625 to S$0.785 since my coverage on 4 Jan. It has since corrected 17% from the intraday high of S$0.945 on 14 Jan 10, roughly in line with the general market. In my opinion, since my previous write-up, there have been several positives for Broadway.

a) Outlook on HDD continues to strengthen

Seagate Technology, the world’s largest maker of hard disk drive (HDD) with a global market share of 32.5% as per TrendFocus as at Sep 09, reported better than expected results. Its 2Q10 revenue surged 33% from US$2.27b to US$3.02b. Earnings swung from a loss of US$2.27b, or US$5.80 per share in 2Q09 to a net profit of US$533m, or US$1.03 per share in 2Q10. This surpassed median estimates of profit of around 65 US cents per share on sales of US$2.85b.

The world’s second largest HDD manufacturer, Western Digital also reported earnings which blew past analysts estimates. For 2QFY10, Western Digital earned US$1.85 per share, compared to 6 US cents a share a year ago (inclusive of a one time restructuring charge of US$113m). 2QFY10 revenue leapt 44% from US$1.8b in 2QFY09 to US$2.6b in 2QFY10. These figures exceeded analysts’ earnings estimate of US$1.36 per share on revenue of US$2.35b.

Hitachi – the third largest HDD manufacturer will be reporting its third quarter ended 31 Dec 09 on 4 Feb 10 (still not available at the time of writing). However, for both Seagate and Western Digital, they have announced stronger than expected results, with upside guidance for 2010 onwards. Both Seagate and Western Digital are postulating growth rates of around 20% above their historical norm of 10-15%. Therefore, the outlook on HDD is extremely robust.

Besides the HDD manufacturers, according to a recent Lim & Tan report, various personal computer (PC) makers have expressed optimism for 2010. Lenovo, China’s largest PC maker said that sale of its products are expected to be boosted as both the corporate and the retail sector adopt new operating system (i.e. Windows 7) and upgrade their computers. This bullish sentiment was echoed by other PC makers such as Hewlett Packard, Acer and Dell.

b) Local component makers are also benefitting

Besides the HDD and PC manufacturers which are benefitting from the upswing in the technology cycle, local component makers have also benefitted. For example, Cheung Woh announced on 18 Jan that it expects a better profit before tax for the second half of this financial year ending 28 February 2010 due to higher than expected sales generated from all business segments. Last week, Lim & Tan also mentioned that after a teleconference with Armstrong management, they believed that they may be too conservative in their earnings estimates for Armstrong.

All the above indications are pointing to good results and guidance for similar component makers like Broadway as 79% of Broadway 9MFY09 revenue comes from HDD components and most of this is sourced from Hitachi and Seagate.

c) JCY International launches IPO

According to Reuters, Malaysian disk-drive component maker JCY International aims to raise up to US$350.9m from its IPO. This would be the country’s second-biggest listing in six years. The price range of the shares is set at 1.60 ringgit to 2.20 ringgit each which values the company at 9-12.5x 2010 earnings. It targets to list on 25 Feb 10.

Broadway is similar to JCY International and is likely to re-rate upwards upon JCY successful debut. To illustrate the similarities / differences between the two companies, I have summarised in a tabular form below.

Table 1: Comparison between Broadway and JCY International (Source: Trendfocus, Reuters)
*JCY International, being denominated in ringgit (MYR) has been adjusted to S$ at S$/MYR: 2.4204
**Revenue and Net Profit for Broadway and JCY International were obtained from their latest available full year financial results respectively.
***PE Ratio for Broadway was calculated based on my own estimates whereas PE ratio for JCY International was provided by Reuters.

d) Stronger company updates

Broadway seems to be growing on all fronts. Firstly, management plans to increase its capacity in HDD components manufacturing by about 10-15% in FY2010.

Secondly, growth in its non-HDD component division (which is dependent on the semiconductor sector) is expected to outpace that of the HDD component division. According to Gartner Inc, it expects semiconductor revenue to rebound 13% from US$226b to US$255b in 2010. This should bode well for its non-HDD component division.

Thirdly, Broadway’s foam plastic division is expected to improve too. According to Lim & Tan’s 11 Jan 10 report, Broadway’s utilization rates have improved to the 80-90% range in 4QFY09, vis-à-vis the 50-70% range in the 9 months to Sept ’09 period. Management is looking to increase this capacity by 60-70% to cope with expected higher business volumes in 2010.

Fourthly, Broadway is continuing its focus on cost efficiency by shifting more of their raw material purchase from Singapore to China. In addition, it has reduced its scrap from both its Wuxi and Thailand plants by about 30%. Continuous measures to reduce cost and increase efficiency should provide support to Broadway’s margins.

Risks remain

As for any investment, there are likely to be risks. In addition to the risks which I pointed out on my 4 Jan 10 article, I wish to highlight that not every technology company is doing well. For example, Qualcomm reported poorer than expected 1QFY10 results. However, this is more of an exception rather than the norm.

Conclusion

In view of the many positives on Broadway since my last update and the impending listing of JCY International at 9-12.5x 2010 earnings, I believe it is highly likely that Broadway would re-rate in the near term. If I peg a conservative 8x to Broadway FY2010F earnings, it should trade at around S$1.09. This represents an approximate 39% upside since its close of S$0.785 on 4 Feb.

Disclosure: Writer is vested