Investment Highlights

• We retain our BUY recommendation on QES Group (QES) with an unchanged fair value to RM0.30/share. Our valuation is based on an unchanged FY19F PE of 15x, while maintaining our earnings forecast.

• We came away from QES’ 1QFY19 briefing learning that its semiconductor customers are opting to upgrade their existing equipment instead of purchasing new ones. Such move is in line with what industry players are doing, cutting capex due to uncertainties from the US-China trade war. This explains the lower sales from its manufacturing segment — RM2.5mil in 1QFY19 vs. RM6.2mil in 1QFY18.

• Fortunately, the company’s bread-and-butter business is distribution of parts to semiconductor and automotive customers. While new sales of semiconductor equipment may be weak, QES is seeing more orders for its distribution business from customers who are upgrading equipment to achieve better yield rates instead of purchasing new ones.

• With QES offering maintenance and servicing, the company is also able to earn fees from performing the upgrades for its customers. For 1QFY19, revenue for distribution and maintenance rose 19.6% YoY and 16.7% YoY respectively.

• QES’ long-term strategy is still focused on expanding its manufacturing segment with two models of automated optical inspection (AOI) equipment slated to be launched in 1QFY20.

• In the near term, the company has secured a project from its customer to distribute voltage sag regulators for protection of semiconductor equipment from minor voltage spike which may result in yield loss. The project is worth around RM4.5mil and will be recognised over the next 2 quarters.

• QES is also in talks with one of its existing customers to distribute cooling additives and hence optimise cooling towers for better energy efficiencies. With an increasing emphasis on environmental, social and governance (ESG) criteria, this may be a lucrative product to be added into the company’s distribution line. Also, QES’ long-standing relationship with semiconductor customers provides an advantage for the company to market this to semiconductor facilities which are heavily dependent on cooling towers.

• 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 semiauto 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 - 7 Jun 2019