D&O’s 9MFY21 core earnings of RM73.5m were below our and consensus full year expectations, making up only 56.8% and 59.6%, respectively. As previously guided, the weaker-than-expected results were affected by production shutdown for 21 days in July-Aug to curb the Covid-19 spread. Nevertheless, we make no changes to our earnings forecasts as we believe there will be a strong catch-up in the final quarter. A higher DPS of 0.75sen was declared for the quarter, bringing cumulative DPS to 1.5sen. We reiterate our Outperform call with an unchanged TP of RM6.31 based on 48x FY22 EPS.

• 3QFY21 revenue rose 9.9% YoY to RM175m. Despite production shutdown for nearly a month, the Group still managed to churn out stronger sales growth for 3QFY21 as automotive LED sales were up 10.2% YoY to RM170.7m while non-automotive LED sales fell from RM3.9m to RM3.8m. All major markets contributed to the stronger automotive LED sales. The Asian market, which accounted for 68.4% of group sales in 3QFY21, grew 14% YoY to RM119.4m. The European market, its second largest sales contributor, rose 7.8% YoY to RM37.1m. Meanwhile, sales contribution from the US market was up by 3.1% YoY to RM13.1m.

• Core earnings jumped to RM20.1m. Stripping out foreign exchange loss (RM2m) and fair value gain on derivatives totaling RM0.3m, the Group’s core earnings surged 62.1% YoY to RM20.1m. 3QFY21 gross margin rose from 27.9% to 29.0% as productivity increased with more automation in place. A higher capex of RM41.6m (2QFY21: RM40.9m) was spent on increasing production capacity, improve machine efficiencies and quality control and plant automation. It is worth noting that inventory level has jumped 48.6% YoY to RM266.9m as it stocks up more input materials to support stronger order book in the near-term.

• Positive guidance. Management expects a strong sequential rebound in sales orders for the final quarter of 2021 as the expanded capacity has been fully booked. Meanwhile, all of its employees have completed two doses of vaccination under the MITI PIKAS program and it has kicked off the booster vaccination programme. Based on our rough estimation, the production shutdown related to the coronavirus spread in July-Aug 21 had caused a backlog worth about RM60m sales and RM7m profit, which we believe will be recognized in the subsequent quarters.

Source: PublicInvest Research - 25 Nov 2021