SAM Engineering & Equipment Bhd is set to see sequential quarterly improvements despite recent challenges, as Maybank Investment Bank Bhd maintained a positive outlook for the company and put a BUY call on the company, with an updated target price of RM5.71, down from RM6.15, based on an unchanged 32.7 times price-to-earnings ratio, which is approximately one standard deviation above the five-year mean.
The company has lowered its earnings forecasts for the financial year 2025 (FY25) to FY27E due to anticipated declines in aerospace revenue and margins, primarily caused by raw material shortages and quality defects from a supplier. In response, FY25E earnings per share (EPS) has been cut by 19%, while EPS for FY26 and FY27 has been reduced by 7% and 6% respectively, reflecting a slower ramp-up of its RJ2 and BB1 plants due to delays in the semiconductor sector recovery.
The aerospace segment has significantly affected SAM Engineering's first quarter (1Q) financial performance, with a core net profit of RM9.9 million, representing a 68% quarter-on-quarter decline and a 43% year-on-year decrease. This downturn was attributed to halted deliveries due to design changes and ongoing material shortages. However, industry checks suggest that these issues are likely to be temporary, with expectations for normalisation in operations over the next one to two quarters.
However, the global aerospace growth outlook remains promising, with both Airbus SE and Boeing Co planning to increase their monthly production rates in the coming years.
According to the research house, the production rate for the Airbus A320neo is set to rise from the current rate of 52 units per month to 75 by 2027, while Boeing aims to ramp up production of its 737Max and 787 models to 50 and 10 units respectively by 2026. These targets indicate a recovery path, although production levels will still be below pre-pandemic figures due to ongoing supply chain disruptions, including shortages of engines, landing gears, and seating.
Despite the current challenges, SAM Engineering is viewed as a secular growth stock, particularly with significant clients in the aerospace sector, indicating a robust potential for future revenue growth. The company's long-term guidance suggests aspirations for a doubling in revenue over the next five years, underscoring confidence in its growth trajectory.
As the aerospace segment stabilises, earnings are expected to improve from 2Q25E, positioning SAM Engineering as a strong player within the industry.