Investment Highlights

• We reiterate BUY on Cape EMS (Cape) with a higher fair value (FV) of RM1.45/share (from RM1.31/share previously) on a rolled-forward FY25F PE of 18x. Our FV implies a compelling FY24F PEG of 0.56, in contrast to peers’ average of 0.71 . We ascribe a neutral 3-star ESG rating to the company.

• Cape’s FY23 core net profit of RM47mil came in below expectations, 8% below our forecast and 12% street’s. The deviation was mainly due to higher-than-expected operating costs, especially depreciation and net finance expenses. Our core profit was calculated after the adjustments of RM4mil listing expenses and RM2mil iConn-related acquisition expenses.

• Nevertheless, we made negligible changes to FY24F-25F earnings because the higher operating and financing expenses assumptions are offset by a 3-year (2024-26) profit after tax guarantee of US$8mil (RM37.1mil) from iConn.

• In addition, we introduce FY26F with an earnings growth of 15% underpinned by multiple secular growth trends, particularly, increasing adoption of 5G, electric vehicles (EVs) and electronic cigarettes (e-cigarettes) in USA market.

• The group did not declare any final dividend in 4QFY23, bringing FY23 total dividend of 1.1 sen/share (implying a payout of 21% in FY23), which we deem to be below our FY23 estimate of 1.7 sen/share. Given the increased outstanding shares as a result of private placement completed in Dec 2023, we trimmed FY24F DPS to 1.7 sen/share and FY25F to 2 sen/share. We also introduce FY26F DPS of 2.3 sen/share.

• On a YoY basis, Cape’s 4QFY23 core earnings declined by 35% to RM9mil, notwithstanding a 25% increase in revenue attributed to increased demand for wireless communication equipment (WCE) and e-cigarettes. The primary factor contributing to the weaker earnings was higher tax expenses (+7x YoY) and increased operating expenses, specifically associated with establishing a new operational team for an electric vehicle venture.

• On a QoQ basis, Cape’s 4QFY23 core earnings decreased by 37% despite a 9% revenue growth bolstered by strong demand for WCE and home appliances. The weaker core earning was mainly ascribed to higher finalised tax expenses of RM7mil compared to near nil in 3QFY23.

• The stock is trading at a compelling FY24F P/E of 16.4x vs peers such as Nationgate’s 21x and Aurelius Technologies’ 19x.

Source: AmInvest Research - 27 Feb 2024