Summary

• In-line with expectations. For 1QFY24, SCOMNET registered core PAT of RM6.0m (+4% QoQ, -3% YoY). The core net profit was broadly within expectations, accounting to 18.0% and 15.4% of ours and consensus estimates as we believe the earnings will be back loaded. Core PAT was adjusted for (i) fair value gain on other financial asset, (ii) PPE written off, (iii) gain on disposal of PPE, and (iv) gain from scrap sales and other disposal.

• YoY. The core PAT increased 8% YoY from RM5.6m in 1Q23, despite a dip of -3% in revenue due to decreased orders from automotive segment, but it was offset by increased orders from Medical segment on Endoscopy Video Cables. Also, the increased in sales of medical products garnered better profit margin and has lifted the core PAT margin to 17% (from 15%).

• QoQ. Core PAT dropped -2% QoQ after factoring in several one-off gains this quarter, despite an improvement in the automotive segment, however the increase were mitigated by higher operating costs from automotive segment and expenses associated with setting up a new factory.

• Solid balance sheet. As at 1QFY24, SCOMNET continues to maintain a solid balance sheet with zero borrowings and a cash position of RM245.55m.

• Outlook. Going forward, the medical segment (79% and 76% of total revenue in 1Q24 and 4Q23 respectively) will be the main contributor to SCOMNET, premised on the introduction and commercialisation of new products in the pipeline and higher demand from Endoscopy Video Cables. Also, we noticed gradual growth to 5% (from 2% in 4Q23) in the automotive segment. Over the next 3 years, SCOMNET will construct a new 5-storey building to house the production of new medical products, and will boost the production floor space by 12k sqm.

Valuation & Recommendation

• Forecast. Maintained.

• Downgrade to HOLD with TP at RM1.52. We downgrade to HOLD (from Buy) on SCOMNET with a target price of RM1.52 as the share price has rallied prior to the earnings. Our target price is derived by assigning a target P/E multiple of 38.0x to FY24f diluted EPS of 3.99 sen.

• Investment risks 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 75.0% of SCOMNET production costs. Exposure to currency risk as most of their products is sold in USD.

Source: Mplus Research - 21 May 2024