Investment Highlights

• We downgrade QES Group (QES) to a HOLD from BUY with a lower fair value of RM0.21/share (previously RM0.28/share), based on an FY20F PE of 12x. We cut our FY19F–FY21F forecasts by 24–53% due to the slower-thanexpected improvement in the semiconductor market as customers continue to delay orders amid US-China trade war jitters.

• QES recorded a RM0.8mil core profit in 3QFY19, bringing 9MFY19 core profit to RM3.0mil. This is after excluding net one-off loss of RM1.7mil mainly from impairment loss on trade receivables. The results fell beneath our expectations, accounting for only 30% of our full-year forecasts. The variation from our forecasts was due to the weaker-than-expected 3QFY19 results.

• 9MFY19 core profit dove 71% despite revenue declining by 10% mainly due to a worsening in the performance of its manufacturing division.

• Segment results:

• Distribution division: The division comprises product distribution and services & supply of spare parts. Distribution revenue rose 6% mainly due to increased deliveries of engineering solutions. The division contributed 94% of group revenue in 9MFY19 (vs. 80% in 9MFY18).

• Manufacturing division: Revenue plunged 74% due to less deliveries of automated optical inspection (AOI) products and delayed deliveries of equipment at the customers’ request. Despite commanding higher margins than the distribution division, manufacturing contributed only 6% of revenue (vs. 20% in 9MFY18).

• On a QoQ basis, 3QFY19 revenue declined 2% as distribution revenue fell despite being partially offset by higher manufacturing revenue. However, 3QFY19 core profit rose 11% QoQ as 2QFY19 had an RM1.8mil impairment loss on trade receivables.

• Moving ahead, the manufacturing division would benefit from the inclusion of two new AOI products i.e. post-dicing inspection and post-proving inspection with beta testing targeted by March 2020. QES has a potential securement of new orders for a customized solution for 200 machines that could contribute ~RM19mil to revenue in 2020.

• Although we like QES for its potential in its manufacturing division and the resilience of its distribution division’s recurring revenue, we are cautious given the equipment distribution segment, which contributes the bulk of its earnings, is facing headwinds from the trade war. Downgrade to HOLD.

Source: AmInvest Research - 22 Nov 2019