Investment Highlights

• We maintain our HOLD recommendation on QES Group (QES) with lowered forecasts and a fair value of RM0.14/share (previously RM0.18/share), pegged to a rolled-forward FY21F PE of 12x.

• We slash our FY20F–FY22F forecasts by 19–61% as the group’s operations have been impacted by the movement control order (MCO) and as QES’ order visibility and delivery for the next couple of quarters have also been clouded by the Covid-19 impact globally. We anticipate a recovery in the manufacturing division to only come in FY21F with expectations of pent-up demand in orders.

• Key updates are as follows:

• QES operations halted by the MCO: The group’s production has been halted since the MCO was announced on 18 March 2020 to contain the spread of Covid-19 locally. Since then, the initial 14-day MCO has been extended by another two weeks to till 14 April 2020. The government is set to announce later today (10 April 2020) whether the MCO will be further extended. Despite being in the list of approved critical manufacturing sectors i.e. the E&E sector including semiconductors, QES has not yet gained approval from the Ministry of Trade & Industry (MITI) to resume production. To date, the group has stopped production for 23 days.

• Order visibility and fulfilment impaired: QES’ order visibility for the upcoming quarters is uncertain, with some customers beginning to hold back on their orders. Besides the disruption in production locally, the group is also facing difficulties in order fulfilment as measures to curb the spread of Covid-19 such as travel restrictions imposed on its engineers and customers have caused a pause in negotiations and machine installations. To recap, the group’s single largest market is Malaysia which contributed 38% of FY19 revenue, with the remainder being exports to Asean countries, China and others with contributions of 57%, 2% and 3% respectively.

• Reiterate our HOLD recommendation on QES as we deem that the positive prospects from the potential recovery and growth in its manufacturing division and resilience of its breadand-butter distribution earnings have been offset by uncertainties relating to Covid-19 which will impact semiconductor sales globally and impair QES’ near-term outlook.

Source: AmInvest Research - 10 Apr 2020