D&O raked in record-breaking earnings of RM124.6m (+114% YoY) for FY21, the sterling results in line with our full-year expectation but exceeding consensus estimates at 96% and 109% of full-year numbers respectively. Starting this year, smart LEDs will be the new growth driver for the group and we expect to see tremendous growth in the next 5 years as more automakers have started to adopt smart LED applications. No dividend was proposed for the final quarter. Following the recent sell-down, we believe it is a good opportunity for investors to accumulate D&O shares as valuations have fallen to attractive forward PER of 29x-35x. We reiterate our Outperform call with a slightly higher target price of RM6.36 (RM6.31 previously) as we roll-over to FY23 but with a lower PE multiple of 40x (48x previously).

• Highest ever quarterly sales. During 4QFY21, group sales rose 23% YoY to RM250m, driven by stronger sales from both interior and exterior automotive LEDs as well as higher automotive LED adoption in the electric vehicle (EV) segment. All major markets contributed to the stronger automotive LED sales. The Asian market, which accounted for 72% of group sales in 4QFY21 (FY21: 70%), grew 23% YoY to RM187m. The European market, its 2nd largest sales contributor, rose 14% YoY to RM43.7m. Meanwhile, the US market saw the biggest jump, up 66% YoY to RM22m.

• Record-breaking quarterly earnings. Stripping out exceptional items, the Group posted its best-ever quarterly core earnings with a growth of 34% YoY to RM41m, marking its 6th consecutive YoY growth. 4QFY21 gross margin remained healthy at 29.6%. The Group spent a total of RM165m in FY21 (19% of FY21 revenue) to expand production capacity, improve machine efficiencies and plant automation. It is worth noting that inventory levels have jumped 70% YoY to RM306m as it stocks up more input materials in anticipation of another capacity growth of 20%-30% this year. The Group has started filling up Plant 2 capacity since last month.

• Industry outlook. According to TrendForce, global penetration rate of LED headlights has exceeded 60% in 2021 with EVs exceeding 90%. Driven by increasing automotive market shipments and the rising penetration rate of LED lighting, global automotive LED market value is estimated to be valued at USD3.51bn in 2021, an encouraging growth of 31.8% YoY. LED headlights and automotive display LED products remain the key growth driver in the automotive LED industry. It is worth noting that, benefitting from improved European customer orders, D&O’s Dominant, ranks No.5 in (refer to Figure 2) in the global automotive LED industry with an estimated global market share of 5.7%, and has hit the highest annual sales growth in 2021 at 46.3%. The automotive LED market demand will maintain its rapid growth trend over the next 5 years, led by i) higher adoption of LEDs in the display backlight (dashboard and central console displays), ii) more car models equipped with bigger displays, and iii) introduction of new features such as HDR, local dimming and wide colour gamut.

Source: PublicInvest Research - 25 Feb 2022