Summary

• We attended a briefing with Supercomnet Technologies Bhd (SCOMNET) and came away with more clarity in their current operations and future plans. After delivering a record high revenue and profit at RM158.3m and RM33.0m respectively in FY22f, we reckon that growth may moderate, owing to the uncertainty surrounding the delivering timing delivery of IHS syringe infusion system in 2H23.

• To play catchup in 2H23. While 1HFY23 figures are expected to remain soft (similar with 4QFY22), we believe that improvement in 2HFY23 will be backed by the (i) potentially higher contribution from IHS syringe infusion system and introduction of new medical products and devices progressively towards end of the year, (ii) resumption of delivery to Ambu A/S post-inventory adjustment and (iii) higher contribution from Stellantis for the supply of fuel tank (commencing February 2023) and wire harness (targeting to commence in 2Q23) for the Peugeot 5008, 3008 and 2008 models.

• Margins stabilising. With the easing of both the material prices and freight costs, margins are expected to turn stable, ranging around high teens in FY23f. We note that SCOMNET is actively pursuing the adoption of automation process with 20- 25% of production are now under automation process. As of FY22, SCOMNET is equipped with a solid balance sheet with a net cash position at RM162.7m and is keeping a lookout for any potential M&A activities that complements existing business in bid to spur growth.

• Introduction of new products to cushion downside. Orders for the Endoscopy Video Cables (EVC) for Covid-19 treatment dropped c.50.0% and is expected to see minimal quantity of delivery from June 2023 onwards as majority of world has entered into the endemic stage. Still, we reckon that the aforementioned downturn may be well cushioned by the introduction of new products that yields higher margins are expected to come onto stream progressively in 2023 and may take up majority of the 2nd floor expansion of 900-sqm floor space.

• Onto next phase of factory expansion. Moving into 2023, the next phase of expansion that entails the construction of 5-storey new factory building will house 12,000-sqm of total production floor space is expected to be completed in 3 years; tentatively in 2025. Majority of the CAPEX for expansion will be borne by their customers. Meanwhile, we believe that the move is timely to ride onto the rising demand for healthcare products and services across the globe.

• Leveraging onto higher budget allocation. We reckon that the budget allocation of RM36.30bn under the revised Budget 2023 (higher than the prior Budget 2023 allocation of RM36.10bn) for the healthcare sector bodes well for SCOMNET. Demand for medical devices will likely to remain strong, premised to the rising healthcare awareness across the globe in recent years. Elsewhere, we note that the proposed of transfer of listing status to the Main Board of Bursa Malaysia is well on track.

Valuation & Recommendation

• We continue to like SCOMNET as a medical products specialist with exposure in the automotive and industrial segment that is backed by long-term and multinational clients. In anticipation that 2HFY23 to play catch up, we made no changes to our earnings forecast and we maintain BUY on SCOMNET with an unchanged 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. Another risk is the exposure to currency risk as most of their products are sold in USD.

Source: Mplus Research - 13 Mar 2023