QES Berhad (QES) posted its 1Q23 results with RM57.3m (-13.7% yoy & -21.5 qoq) of revenue and RM 4.8m of PATAMI (-29.1% yoy and -12.8% qoq). The lacklustre performance was attributed to decline in both distribution and manufacturing divisions due to the downturn in the semiconductor cycle.
Profit below expectation. QES’s 1Q23 performance has missed our expectation as PATAMI only accounted for 18% of our FY23 forecast. This is primarily due to the delay in delivery of equipment in the manufacturing segment and the largerthan-anticipated impact of the semiconductor downturn on the company.
Decline in all Business segments. In 1Q23, QES’s Equipment distribution division reported RM7.3m of profit (- 11.3% yoy but +201.4% qoq), RM0.2m profit was posted by Materials & engineering solution (-73.3% yoy and -82.5% qoq) and loss of RM1m by the Manufacturing segment (compared to profit of RM 2m in 4Q22 and RM 0.7m in 1Q22).
Geographical segments. Philippines, Thailand and Indonesia are the only markets that registered a yoy growth with +64.3% yoy and +26.8% qoq, +25.1% yoy and +8.7% qoq and +50.3% yoy but -35% qoq respectively. Sales from Malaysia dropped 11.2% yoy and 15.4% qoq while revenue from China declined 98.3% yoy and 71.9% qoq.
Manufacturing division incurred losses. Manufacturing division posted revenue of RM5.8m and incurred a loss of RM1m in 1Q23. This was mainly dragged by the delayed delivery of an advanced metrology system (AMS) equipment worth RM5m. We expect the equipment will be delivered and revenue recognized by 2Q23.
Comments
Diversification to mitigate risks amidst semiconductor downturn. The Group's approach in diversifying its customer segments beyond a heavy reliance on semiconductors industryhas positioned it to mitigate risks during the semiconductor downturn and gained resilience in fluctuating markets compared to its peers.
Sturdy balance sheet minimizes risk amid economic uncertainties. QES registered a net cash position of RM61.3m with net gearing of 0.19x as of 1Q23. The healthy balance sheet has formed a solid foundation for the Group in reduce risk amid the uncertainty of global economic.
Cautiously optimistic on 2H23. The Group is currently in a challenging time due to the slowdown in semiconductor outlook. However, we anticipate a better performance in second half of FY23 compared to the first half. This expectation is bolstered by the order book on hand of RM113 million as of April 30th 2023, coupled with the anticipated earnings contribution from the JV with Applied Engineering.
Earnings Outlook
We have revised downwards our FY23 net earnings to RM25.4m (from RM26.3m previously) after slashing our sales forecast from manufacturing division on the backdrop of challenging outlook in the industry. Nevertheless, we maintained our FY24F net earnings at RM 29m.
Valuation/Recommendation
Maintained BUY with unchanged target price of RM 0.73. Our valuation is based on 21x PER of FY24F EPS of 3.5 sen, which is 30% discount to the industry average forward PE on 30x as taking considering the smaller scale and lower profit margin of the Group. Our fair value of the stock renders 37% upside against of the current closing price of RM0.535.
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