2HFY09 may sink into red. Willas-Array Electronics (WAE) recently updated that the group had encountered a very soft 2HFY09 amid a fall-off in the global electronics demand. The worst was seen in Jan-Feb 2009, where the group suffered not only from a seasonally weak quarter but also from long holidays during Chinese New Year. Among the components, theindustrial segment had held up the best. However, WAE is not expected to withstand the broad-based downturn in other segments. Consequently, WAE warns that 2HFY09 may not be profitable.

Outlook remains uncertain. Like many industry players, WAE has been aggressively cutting its inventory to a low level by selling excess inventory at lower ASPs. This reduction process had recently stabilized, and thegroup is starting to see orders returning after months of capacity reduction among its principals. While the group hopes that demand would pick up from April, it notes that the improvement in orders may not be sustainable and that the outlook remains uncertain. In addition, it believes that the recovery, if it occurs in FY10, is likely to be slow and gradual.

Financial position still healthy. On a brighter note, WAE assures that its financial position is still healthy. Thanks to its specialized team for credit checks, the amount of bad debts WAE incurred over the period is not expected to exceed that of last year (~47% of receivables are insured). To keep its costs down, the group is also embarking on a four-day week and other cost-cutting measures such as salary reduction and no pay leave. In the near-term, WAE is looking to benefit from the economic stimulus package rolled out by the Chinese government (for example, 3G telecommunications), and a strong, major customer who is taking the opportunity to expand its market share in China amid the downturn.

Upgrade to HOLD. We have adjusted our FY09F earnings to reflect a possible loss for the fiscal year. Due to the uncertain outlook, we now deem it inappropriate to base our fair value on earnings forecasts. As such, we adopt a price multiples based on NTA and peg it to 0.25x FY10F BV, near to its lowest-ever 0.24x P/BV since listing. This in turn yields a fair value of S$0.06 (S$0.04 on 4x blended FY09/10F EPS previously). As the share price has maintained around its current level lately, we believe the bulk of negatives have been priced in. Hence, we upgrade WAE from SELL to HOLD.