Investment Highlights

• We maintain our HOLD recommendation on QES Group (QES) albeit with a lower fair value of RM0.18/share, (previously RM0.21/share), pegged to an FY20F PE of 12x. We have lowered our FY20F–FY21F forecasts by 14–19% in anticipation of lower orders in the 1HFY20 amid the impact of the coronavirus disease 2019 (Covid-19) outbreak.

• QES recorded a RM0.3mil core profit in 4QFY19, bringing FY19 core profit to RM3.7mil. This is after stripping off net one-off losses amounting RM0.4mil mainly from written off inventories which were offset by gains relating to unrealized forex, PPE disposal and reversal on trade receivables. The results fared beneath our expectations, missing our full-year forecasts by 32%. The variation was due to much lower-thananticipated pickup in orders from its manufacturing division in 4QFY19.

• FY19 core profit plunged 72% YoY in tandem with a 16% decline in group revenue mainly due to its manufacturing division’s worsening performance. QES’ revenue fell in all of its geographical markets except for Malaysia and Thailand amid a slowdown in the global semiconductor industry.

• Segmental review:

Manufacturing division: Revenue dove 80% YoY and QES registered an LBT of RM4.3mil in FY19 (vs. PBT of RM6.2mil last year) due to less deliveries of automated optical inspection (AOI), as its manufactured products are used by semiconductor companies. Note that the manufacturing division commands higher margins than the group’s distribution division.

Distribution division: Revenue had slipped 2% YoY in 4QFY19 mainly due to revenue from services and supply of spare parts sliding 1% while product distribution revenue also fell by 3%.

• On a QoQ basis, 4QFY19 revenue rose 5% as higher equipment distribution sales offset lower manufacturing revenue. The manufacturing division recorded a lower revenue of RM0.1mil due to RM3.6mil sales returns relating to the Philippines. This reversed the impairment provision of RM1.8mil made in 2QFY19 earlier.
• Moving forward, QES’s manufacturing division is expected to benefit from the addition of two new AOI products i.e. post-dicing inspection (PDI) and post-probing inspection (PPI). Beta testing for the new products has been pushed to July 2020.

• FY20 outlook: The group anticipates a challenging 1QFY20 due to impact of the Covid-19 outbreak, but expects orders to recover strongly thereafter in anticipation of the transition to 5G across markets. We await further details on the group’s orders when we meet with the company’s management for a results briefing on Friday.

• We continue to like QES due to its growth potential for its manufacturing division due to margin expansion as fully-automated machines command 4x higher ASP vs. semi-automated machines, and the resilience of its distribution division’s recurring revenue, but we believe that it is fairly valued at its current price. Maintain HOLD.

Source: AmInvest Research - 25 Feb 2020