Westech Electronics

As they say, when it rains, it pours.

WesTech Electronics is going to need more than an umbrella and a raincoat to weather out this storm.

Electronic companies struggled to turn out decent margins for their latest earnings.

But a quick review by OCBC Investment on 5 September revealed that the technology sector is in for a slowdown.

WesTech was among the handful of electronic companies under OCBC Investment's coverage with less-than-inspiring recent earnings.

Despite bleak prospects, WesTech braced itself for the upcoming challenge and assured shareholders of a profitable FY2008.

To seal the deal, it declared an interim dividend of 0.2 cents despite an 81% slide in net profit to S$661,000.

But in a cruel twist of fate, WesTech announced on September 30 that one if its major Taiwanese customer would not be able to pay its outstanding debt of up to US$35 million. Because of that, it expects its FY2008 performance to be 'adversely affected'.

While Westech is already negotiating with the customer over the payment, the business has also initiated legal proceedings to recover the amount owed and at the same time is trying to borrow money from other financial institutions.

WesTech's accounts receivables are insured for a limit of only US$15 million with an insured percentage of 90% or US$13.5 million.

CIMB downgraded the stock to a SELL on October 6 with a target price of S$0.04. It was touting a BUY call three weeks earlier. While it doesn't rule out a minor rebound, the analyst says that any rebound is a chance to sell.

Taking a conservative stance, CIMB does not expect dividends for FY2009 and FY2010.

According to the analysts, WesTech's only hope would be the support from its bankers.

OCBC Investment analyst Kevin Tan hasn't yet decided what to do with the company as the stock is currently UNDER REVIEW.

Despite an absence of a call in his October 6 report, Kevin also expects full year earnings to be hit hard. WesTech was previously rated a BUY on August 13.

According to a personal friend, who's a relationship manager in a foreign bank, component distributors are the worst hit as they are often squeezed by both customers and suppliers. He also said that 'many have failed'.

A key consideration for the bankers: would WesTech be able to pay back its loans? The company burned cash in FY2007 and has been in a negative free cashflow position since 2006.

Please seek professional advice before making any investment decisions.

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