Summary

• Supercoment Technologies Bhd’s (SCOMNET) 4QFY22 net profit fell 23.1% YoY to RM6.1m, dragged by post-Covid inventories adjustments from the medical segment and decrease in demand for Endoscopy Video Cables that were used in Covid treatment. Revenue for the quarter declined 9.3% YoY to RM37.3m.

• For FY22, cumulative net profit added 30.9% YoY to RM33.0m; which came in below expectations at 92.1% of our forecasted net profit of RM35.8m and 89.0% of consensus forecast of RM37.1m. During the quarter, SCOMNET continues to operate in a healthy balance sheet with a net cash position at RM162.7m.

• In 4QFY22, net margins contracted to 16.3% vs. 19.2% recorded in the previous corresponding quarter due to (i) unfavourable foreign exchange rate and (ii) increase in operational cost arising from the higher minimum wages.

• We reckon that net margins may stay in mid-to-high teens in 1HFY23 before potentially improving towards slightly above 20.0% in 2HFY23 after the issue of defective products received from its FDA-approved supplier resolves. While there were several rounds of selling price revisions last year, we reckon that margins recovery will be challenging due to the elevated copper prices that traded above USD8,000/MT year-to-date vs. USD5,000-6,500/MT level during pre-pandemic.

• Moving forward, we expect the medical segment which makes up to 64.0% of total revenue in 4QFY22 to remain as the key contributor to the overall group revenue. This will be supported by progressive launches of new products launches in the pipeline for 2023.

• The factory expansion is in progress as the group sets aside c.RM25.0m over the next 3 years for the construction of new 5-storey building to house the production of new medical products. Construction may kick start this year and is expected to be completed in 3 years.

• Meanwhile, the proposed transfer of listing to Main Market of Bursa Malaysia is largely on track. Upon completion of the corporate exercise, the move will enhance the confidence of its business partners, employees and shareholders as well as attract larger pool of institutional investors.

Valuation & Recommendation

• Given that the core PATAMI came in below expectations, we reduced our earnings forecast by 10-11% for FY2Y23f to FY25f to account for the hiccup in new product launches and weaker margins from the higher operational costs. Nevertheless, we maintain BUY on SCOMNET with a lower target price of RM1.74. Our target price is derived by assigning a target P/E multiple of 38.0x to FY23f diluted EPS of 4.6 sen.

• Risks to our recommendation include potential delay in FDA approval of new product launches which affects the prospects of growth in new income stream. Fluctuation in raw material costs may affect margins whereby material cost accounts approximately 50.0% of SCOMENT production costs. Exposure to currency risk as most of their products are sold in USD.

Source: Mplus Research - 22 Feb 2023