Investment Highlights

• We maintain our BUY call on QES Group (QES) but reduce our fair value to RM0.30/share (previously RM0.34/share) after tweaking our FY19F–FY21F earnings lower by 7–11% to account for weaker manufacturing revenue, amid the slowdown in the semiconductor industry. Our valuation is based on an unchanged FY19F PE of 15x.

• 1QFY19 core net profit of RM1.8mil (+21.6% YoY, -46% QoQ) accounted for only 11% our full-year forecast and consensus estimates. While 1Q is seasonally weaker for the company, we still deem it below expectation owing to the 60% YoY decline in manufacturing sales which are mainly dependant on customers in the semiconductor industry. The manufacturing segment accounts for 18% of the group’s revenue.

• QES was not spared from the negative impact arising from the long-standing US-China trade dispute which has been worsening in the recent weeks after the US raised tariff on Chinese goods and ban Huawei from conducting business with US companies.

• Comparing QoQ, core net profit tumbled 46% owing to seasonality coupled with lower group sales (-32.6% QoQ). The decline in sales was seen across all segments with manufacturing performing the worst, recording a 70% QoQ drop.

• Thankfully, QES still generates the bulk of its sales from distribution (+19.8% YoY) and servicing fee (+15% YoY), catering towards a wide range of customers from the semiconductor, electrical & electronics and automotive industries. This explains the company’s ability to grow its revenue 5.9% YoY, cushioning some setbacks caused by the negative outlook in the semiconductor industry. Distribution commands almost 60% of the group’s total sales.

• Operationally, the company saw EBITDA margin and pretax margin improve marginally both on a YoY and QoQ basis, thanks to better cost control.

• We continue to like QES for its: (1) manufacturing segment, which may lead to margin expansion with fully automated machines commanding 4x higher ASP compared with semi-auto ones; (2) recurring revenue from its trading and servicing business that remains defensive amid the trade war; and (3) undemanding valuation of 10.3x FY19F PE, representing a 39% discount to the sector average forward PE of 17x.

Source: AmInvest Research - 28 May 2019