The Group reported a 2QFY22 net profit of RM44.5m (-30.3% YoY, +12.9% QoQ), which continued to be weighed by higher operating costs. Cumulative 1HFY22 net profit of RM83.9m (-35.7% YoY) is deemed below expectations at only 31% of our and consensus full-year estimates, despite expectations of a stronger 2HFY22 on account of new job orders from an existing key customer. The discrepancy is largely due to higher costs and delayed operational efficiencies this year. We cut FY22/FY23/FY24 estimates by 23%/14%/15% as we incorporate higher labor and materials costs, with revenue remaining unchanged however. Our PE-based target price is lowered to RM1.21 (RM1.40 previously), tagged at 15x multiple to FY23 EPS. Our Outperform call is affirmed as we continue to like the longer-term investment merits of the company. A second interim dividend of 0.4sen was declared, bringing cumulative YTD dividend to 0.8sen (1HFY21: 2.4sen).

• 2QFY22 revenue of RM1.01bn (+1.9% YoY, +4.8% QoQ) reflects steady order flows and a return to normalcy post-movement restrictions, with a stronger 2HFY22 expected as the Group commences production for an existing key customer. While PCBA (printed circuit board) orders remained weak YoY, this was partly mitigated by contributions from box-built assemblies for a new customer. By country of operations, Malaysia (~89% of total revenue) was stronger again QoQ as full production resumed. China continues to suffer from under-utilization of its capacity, reflected by the YoY and sequential drops in revenue.

• 2QFY22 net profit of RM44.5m (-30.3% YoY, +12.9% QoQ) reflects an easing of cost pressures seen in 1QFY22, the latter mostly one-off for COVID related expenses. Higher labor and raw materials costs remained an issue this current quarter, resulting in gross margin of only 4.4% (1QFY22: 4.1), compared to 6.4% in the corresponding period last year. Lower orders for its PCBAs exacerbated the decline in profitability given its higher margins.

• Outlook. The Group has been expanding its capacity in recent quarters, having spent about RM150m, a reflection of healthy prospects ahead. Orders from key customers are expected to remain healthy and robust. Mass production for some of its customers are expected to be ramped up once labor sufficiency issues are resolved, which is expected soon when our international borders are re-opened. This will also be supplemented by the hiring of more local workers. The Group’s share price had recently taken a hit due to renewed concerns over its labor practices, though we think it to have been largely overblown Please refer to our report dated March 4 for clarity on this issue. We see the current weakness as an opportune time for accumulation.

Source: PublicInvest Research - 28 Mar 2022