PublicInvest Research

Author: PublicInvest   |   Latest post: Fri, 13 Dec 2019, 10:07 AM


D&O Green Technologies - Strong Finish To 2018

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D&O Green Technologies’ (D&O) earnings nearly doubled to RM35.6m in FY18 on the back of encouraging automotive LED sales. The results made up 96.4% of our full-year forecasts but missed street expectations by 8.5%. Nevertheless, the results would have been even better if not for of a 5% appreciation in the Ringgit against its export currencies as well as a slowdown in China’s vehicle demand. No dividend was declared for the quarter. Maintain Outperform call with an unchanged TP of RM0.86 though we caution for potential near-term weaknesses from challenges in China. Long-term prospects are intact however.

  • 4QFY18 revenue (QoQ: +13.5%, YoY: +6%). Group revenue grew 6% YoY to RM140.5m, driven by a 7.1% YoY increase in automotive LED sales thanks to continuous growth in the industry on the back of increased customer penetration. Nevertheless, the automotive LED sales were affected by a slowdown in China and EU vehicle sales. China’s vehicle sales dropped 13% YoY in 4Q 2018 as consumer sentiment weakened, resulting in excessive LED supplies within the supply chain. Meanwhile, EU’s vehicle sales fell 10%-12% during the same period following the introduction of WLTP car emission regulation.
  • 4QFY18 core profit (QoQ: +34.4%, YoY: +101.6%). D&O’s core profit doubled to RM12.9m after stripping out FX loss of RM1.5m. The strong results were mainly led by improved gross margin from 26.1% to 29.7% thanks to better sales mix, cost management and efficiency gains. It is worth noting that the R&D expense jumped 75.3% to RM8.1m as more spending is allocated for new product development, namely, new headlamp and Smart LED packages as well as additional product stress test qualifications to comply with the new AEC-Q102 specifications and other automotive stress test standards as requested by customers.
  • Outlook. Renovation works at the new factory building next to Dominant’s existing plant is on schedule. Phase 1 of the renovation plan, comprising the office building is expected to be completed by 2QFY19. Meanwhile, capex over the next few years is expected to remain high as Dominant continues to expand its production capacity, improve machine efficiencies and quality control processes, automate certain labour-intensive processes and strengthen in-house test capabilities. On the sales outlook, management expects to see healthy topline growth in FY19 despite some hiccups such as weaker car sales volume and supply chain adjustment which may dampen its revenue growth in the short-term. China market, which is one of its major sales markets, saw a slowdown in vehicle demand since July 2018 and weak sentiment has further accelerated in 4Q on consumer jitters, forcing Chinese car makers to cut vehicle production and purchases including LEDs in order to clear excessive inventories within the supply chain. The accelerated negative growth rate would expose Dominant to downside risk on its LED exports to China over the next few months.

Source: PublicInvest Research - 21 Feb 2019

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