Investment Highlights

• We initiate coverage on QES Group (QES) with a BUY recommendation and a fair value of RM0.34/share based on FY19F PE of 15x, representing a 42% upside. To be conservative, we attach a 20% discount to its peer average forward PE of 18.9x to account for the group’s lower income base.

• With an impressive profit CAGR of 30% in the equipment manufacturing segment from FY14-FY18, QES has room for a rerating, more so with the market’s misconception that it is merely a distribution company.

• QES has 3 new products in the pipeline to drive its manufacturing segment. As these are fully automated equipment, they potentially command 4x higher selling price compared with semi-automated ones while enjoying 5-10ppt higher gross profit margin. We believe this development will translate into stronger revenue growth coupled with margin expansion as more semiconductor industry players upgrade to fully automated equipment.

• This trend is particularly evident among customers in the automotive semiconductor space. Stringent qualification processes necessitate the need for automation to eliminate human error and improve efficiency. With a development time frame of 1–2 years, we expect the new equipment to boost earnings significantly in FY2020.

• For FY19, earning drivers will be the existing fully automated post-wire bonding equipment which will continue to see higher demand, rising in tandem with the increasing complexity in chip packaging.

• QES’ distribution segment, its bread-and-butter business, will continue to provide steady recurring income. This is supported by its strong distribution network in the Asean region. China will be the next target for growth, riding on the Chinese government’s ambition for its semiconductor industry. Distribution accounts for 60% of total revenue.

• Currently, the facility is running at 97% utilisation rate. While the company has yet to indicate any expansion plans for the near term, we take comfort in its strong net cash position of RM38mil which will provide the group with the financial ability to expand its floor space when the need arises.

• QES is currently well undervalued, trading at 10.2x FY19F PE, representing a 46% discount to the peer average of 18.9x. In addition, the company’s PEG of 0.6x is below the peer average of 0.9x.

Source: AmInvest Research - 19 Mar 2019