Summary

• Supercomnet Technologies Bhd’s (SCOMNET) 2QFY23 net profit fell 22.4% YoY to RM7.3m, impacted by the decline in demand across all 3 segments. Revenue for the quarter contracted 16.4% YoY to RM33.3m.

• For 6MFY23, cumulative net profit decreased 14.8% YoY to RM14.3m. The reported earnings came in at 36.6% of our forecasted net profit of RM39.1m and 37.8% of consensus forecast of RM37.9m. Although the reported numbers fell short of our full year forecast, we deem it to be in line as we expect SCOMNET to deliver stronger 2H numbers.

• In 2QFY23, net margins improved to 21.9% vs. 18.8% recorded in 1QFY23, driven by the increased in sales of higher profit margin products and favorable foreign exchange rate.

• We reckon that net margins may stay at current levels for 2HFY23 as the issue of defective products received from its FDA-approved supplier resolves. As at end- 2QFY23, SCOMNET continues to maintain a lean balance sheet with zero borrowings and a cash position of RM62.3m, while also operates in a net operating cash flow position.

• Going forward, the medical segment (69.0% of total revenue in 2QFY23) is expected anchor to the overall contribution, premised to the introduction and commercialisation of new products in the pipeline. Meanwhile, the automotive segment contribution is also expected to deliver improvement from supply of wire harnesses and fuel tanks for the Peugeot 5008, 3008 and 2008 models to Stellantis with deliveries expected from September 2023 onwards.

• Factory expansion plans are on track with the 2nd floor expansion in existing operations will add 990sqm of floor space. In addition, the group has also allocated c.RM25.0m from internally generated funds over the next 3 years for the construction of new 5-storey building to house the production of new medical products. This will boost production floor space by 12,000sqm.

• Meanwhile, we note that the completion of listing transfer to Main Market of Bursa Malaysia is a key milestone for SCOMNET. The move is a testament to their solid financial track record and the move may garner greater interests from institutional participants.

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 a higher target price of RM1.90 as we rolled over our valuation metrics to FY24f. Our target price is derived by assigning a target P/E multiple of 38.0x to FY24f diluted EPS of 5.0 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 is sold in USD.

Source: Mplus Research - 23 Aug 2023