Investment Highlights

• We maintain our HOLD recommendation on QES Group (QES) with an unchanged fair value of RM0.21/share, pegged to an FY20F PE of 12x.

• We increase our FY19F earnings slightly to account for higher orders in 4Q amid anticipation of a gradual pickup in orders for its manufacturing division as the group said that activities from semiconductor customers are moving upwards for the quarter. We keep our FY20F–FY21F forecasts unchanged.

• We attended the group’s 3QFY19 analyst briefing with the following key takeaways:

• 3QFY19 results highlights: 9MFY19 core profit declined 71% while revenue fell 11% mainly due to the slowdown in the global semiconductor industry affecting manufacturing revenue as QES’ manufacturing products are primarily used by semiconductor companies. This was despite recording higher distribution revenue. Group gross profit margin stood at 21% (vs. 24% in 9MYF18) due to a 103% decline in manufacturing gross profit despite distribution gross profit rising 6%. QES had also recognized an RM1.8mil impairment of trade receivables in 2QFY19. Malaysia was QES’ single largest market in 3QFY19, growing 20% YoY, making up 40% of group revenue. Asean ex Malaysia revenue dropped 20% while others also fell by 52% (Exhibit 1).

• Outstanding order book of RM45mil as at September 2019 where RM35mil comes from its distribution division and RM11mil is for its manufacturing division.

• QES has tested its precision tilting sensing (PTS) equipment with one of its customers who is interested to purchase 195 of these machines. The group has received the purchase order for 1 unit. With an ASP of US$20K per machine, sales potential for this order is ~RM15mil in 2020. However, we have not imputed this into our forecasts.

• We continue to like QES for the potential in its manufacturing division and the resilience of its distribution division’s service & spare parts business. However, we are cautious on the slowdown in the semiconductor industry impacting manufacturing sales in the nearer-term and thus, recommend a HOLD on QES.

Source: AmInvest Research - 27 Nov 2019