Merrill Lynch yesterday initiated coverage of Simplo Technology Co (新普科技) with a "buy" rating on the world's largest supplier of laptop battery packs in light of the company's leading position, rising market share and strong earnings growth prospects in the coming years.
Merrill Lynch gave a target price of NT$130 for Simplo in its research note released yesterday. That compares with a share price closing of NT$109.5 on the GRETAI securities market yesterday, when Simplo's stock closed limit-up.
Merrill Lynch said it expected strong sales momentum in the notebook computer market in the next two years, driven by the launch of Microsoft's Vista operating system and Intel's new platform Santa Rosa.
Strong gains
"This will provide a huge addressable market for notebook computer food chain players and Simplo should benefit from this wave ... and continue to deliver strong share gains from 20 percent this year to 22 percent next year and 24 percent in 2008 worldwide," it said.
Simplo's battery pack shipments are expected to grow significantly from 16 million units to 22.6 million next year and 30.4 million in 2008, Merrill Lynch said.
The company supplies battery packs to leading laptop suppliers, such as the world's top two vendors Hewlett Packard Co and Dell Inc, as well as Acer Inc and Apple Computer Inc. The company would start delivery to Toshiba Corp in late first quarter next year, the report said.
Simplo received a boost in orders in the third quarter when Dell Inc issued an urgent shipment order for 400,000 battery packs after announcing on Aug. 14 a recall of 4.1 million Sony lithium batteries used in its laptops.
Solid margins
Merrill Lynch expected Simplo to sustain gross and operating margins at highs of 18 percent and 9.5 percent, respectively, in the next two years, considering its solid execution on cost cutting and yield improvements at its new China plant, it said.
Net profit could grow 30 percent to NT$1.76 billion, or NT$11.75 per share, next year and 25 percent to NT$2.21 billion, or NT$14.70 per share, in 2008, from an estimated NT$1.35 billion, or NT$9.01 per share this year, Merrill Lynch said.
Return on equity was projected to rise to 30 percent in the coming two years from an estimated 28 percent this year, the brokerage added.
Meanwhile, Simplo's penetration into smartphones and power tools in the second half of this year and benefits from the diversification of its strategic investor, Quanta Computer Inc (廣達電腦), into consumer devices may collectively help raise its non-notebook revenue and relieve investors' concern over its high concentration on a single product line, the report said.
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