Investment Highlights

• We maintain our HOLD recommendation on QES Group (QES) with unchanged forecast and fair value of RM0.18/share, pegged to an FY20F PE of 12x.

• Key highlights from QES’ 4QFY19 briefing are as follows:

1. Results summary: 4QFY19 results were beneath expectations, missing our full-year forecasts by 32%. FY19 core profit plunged 72% YoY as revenue declined 16%, mainly dragged by the dismal performance of its manufacturing division. .

The group’s overall gross profit margin (GPM) stood at 20% in FY19, decreasing by 2 ppts YoY (vs. 22% in FY18) as manufacturing GPM deteriorated by 43ppts YoY to -18% (vs. 25% in FY18) due to less automated optical inspection (AOI) deliveries amid a slowdown in the global semiconductor industry and as some deliveries were delayed at customers’ request. Furthermore, there was an RM3.6mil sales return in 4QFY19 resulting in negative revenue for the Philippines. Distribution GPM was relatively unchanged at 21-22%.

Malaysia was QES’ single largest market in FY19, contributing ~38% of group revenue, growing 8% YoY. However, Asean ex Malaysia, China, and others dropped by 29%, 49% and 64% YoY respectively due to decline in semiconductor sales globally (Exhibits 1 & 2).

2. Manufacturing division updates:

• Improve PWB capabilities: Moving ahead, the group is making continuous improvements on its post-wire bonding (PWB) machines to have higher unit-per-hour (UPH) machine rates and 3D capabilities.

• Further delays to be seen for PDI and PPI AOI: The addition of the group’s new AOI products, which are postdicing inspection (PDI) and post-probing inspection (PPI), will help mitigate volatility relating to PWB orders and boost manufacturing division earnings ahead. Beta testing for the two new products have been postponed till July 2020 due to issues with software development.

• Precision tilt sensing (PTS) system orders expected in April 2020: The group’s PTS system has stabilized after tests and monitoring over two months. QES expects the first batch of orders of 5–10 systems to come in April 2020. ASP per machine is around US$20K, with a total revenue of ~RM400K–RM800K expected. The customer could potentially purchase up to a total of 195 PTS systems which translates to a revenue of RM16mil, but this will be spread over the course of 2 years.

Source: AmInvest Research - 2 Mar 2020