Summary

• Supercomnet Technologies Bhd’s (SCOMNET) 1QFY23 net profit decreased 5.2%  YoY to RM7.0m, dragged down by weaker contribution from the medical segment  as demand for Endoscopy Video Cables that used in Covid-19 treatment tumbled.  Revenue for the quarter was flat at RM37.4m.

• QoQ wise, net profit climbed 15.2% on higher contribution from the automotive  segment. The reported earnings came in at 17.9% of our forecasted net profit of  RM39.1m and 17.3% of consensus forecast of RM40.6m. We deem the figures to  be in line as we expect 2H numbers to play catch up with the recovery in sales  orders from one of their major customers; Ambu, whilst raw material supply for the  IHS syringe infusion system expected to be resolved in mid-2023.

• In 1QFY23, net margins improved to 18.8% vs. 16.3% recorded in 4QFY22, due to (i) increased in sales of higher profit margin products that mitigated the higher  operational expenses from the rising minimum wages and higher electricity tariff.

• 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.

• We expect the medical segment (60.0% of total revenue in 1QFY23) to remain as  the key contributor to the overall revenue. This will be supported by progressive  launches of new products in the pipeline for 2023. Meanwhile, the automotive  segment contributions are expected to improve from supplying wire harnesses and  fuel tanks for the Peugeot 5008, 3008 and 2008 models to Stellantis.

• The factory expansion remain underway 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. Upon completion, this will bring additional  12,000 sqm of production capacity.

• Meanwhile, the proposed transfer of listing to Main Market of Bursa Malaysia is  largely on track. SCOMNET is finalising the application documents to the Securities  Commission for the application of transfer. We reckon that the move may likely to  conclude by end 2023.

Valuation & Recommendation

• Given that the reported earnings are deemed to be within expectations, we made no  changes to our earnings forecast, in anticipation of stronger results in 2HFY23. 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 the 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 - 30 May 2023