Full year net profit fell 19% to $22.4m (-19% yoy), reflecting (1) a substantial fall in HDD component and foam packaging revenue in 4Q08 (sales -18% yoy, 14% qoq), (2) lower gross margin in 2H08 due to semiconductor losses, higher labour costs in China and more expensive raw materials, and (3) a forex loss of $3.2m as the RMB, Yen and Baht moved against its main operating currency.

We forecast 2008 to be followed by a more severe 47% fall in earnings in 2009, which will reflect the full extent of the weakening in Broadway’s business. 2008 was actually buffered by a relatively stronger 1H08. To illustrate, the split in earnings between 1H and 2H08 was 70:30 compared to 30:70 in 2007.
Broadway’s foam packaging business, which accounted for 20% of revenue and an estimated 26% of operating profit in 2008, is expected to contract the most given that most of its activities is located in southern China, where the manufacturing base has taken a sharp hit with the drying-up of exports. Foam revenue grew 33% in 2008 but this will not be sustained. We forecast a 20% drop in 2009.

The HDD business is also expected to be hit as global economic woes wreak havoc on PC/HDD demand. According to Trendfocus, worldwide HDD shipments are expected to fall 11.6% to 477m units from 540m in 2008. 4Q08 shipments fell 19.4% in 4Q08, with another 11.5% forecast for 1Q09. Major customer Seagate is expected to bear the brunt of this slippage with a 23% fall forecasted in 1Q09.

Despite the severe fall in the share price to just 0.3x NTA of $0.50, we do not see any positive catalysts. Although Broadway maintained dividends of 2 cents a share for FY08, we do not expect this to be sustained in FY09 as cashflow is expected to worsen along with the profit decline. Maintain Hold.