Slightly worse than expected. Adampak saw a 31.2% drop in turnover during 1Q09 due to inventory rationalisation by its customers (which we believe would include HP, WD and Seagate) that was in turn attributed to lacklustre demand. However, net profit fell a relatively larger 62% as margins were eroded due to a change in sales mix as revenue from the higher-margined electronics sector fell more compared to the non-electronics sector.

Affected by weak macro outlook. Even Adampak’s bigger peer Brady Corp – whose market cap is at least 40 times larger than the company – was not spared from the slowdown in the tech industry as its recently released 3QFY09 results showed a drop of 28% and 48% for top and bottomline respectively. However, the balance sheet of Adampak remains strong with almost zero debt while it continued to generate positive cash flows – free cash flow per share stood at 1.46 US¢, notably higher than its EPS of 0.24 US¢.

Looking for a better 2Q09. As with most HDD component suppliers, we expect Adampak’s revenue to increase by at least 20% QoQ in 2Q09 due to inventory restocking activities. Margins should also improve as the company manages to reap economies of scale.

We are revising down our top and bottomline estimates even though we are expecting a better 2Q09 as earnings visibility in 2H09 remain low. Additionally, we may also have under-estimated the extent of the slowdown in 1Q09 – hence, our previous FY09 forecasts have accordingly been a tad too optimistic.

Recommendation. Based on our single-stage dividend discount model on assumptions of a dividend payout ratio of 40% and terminal growth rate of 1%, we maintain NEUTRAL but reduce our target price to S$0.15 (from S$0.165 previously).