Encouraging Start The Group reported a net profit of RM60.7m (+54.1% YoY, +75.6% QoQ) for 1QFY23 as it returned to some form of operational normalcy without impairments or write-offs which had marred its financials in recent quarters. The numbers are within our and consensus expectations at 26% and 23% of full-year estimates respectively. We remain wary over potentially weaker consumption spending in the near term, particularly in the US and Europe which have seen rapid rate hikes by respective central banks to contain spiraling inflationary pressures, which may in turn affect sales. That said, we still like the longer-term investment merits of the company, underpinned by steady order flows from its key customers, and affirm our Outperform call with an unchanged PE-based target price of RM1.23. A first interim dividend of 0.5sen was declared.

• 1QFY23 revenue of RM1.29bn (+33.7% YoY, +28.0% QoQ) is the highest quarterly achievement on record, and is commendable considering presumably waning purchasing power globally. Management has guided that order flows remain satisfactory for now, vis-à-vis the prospect of weakening consumer spending, though they remain on the watch for signs of weakness. 
  By country of operations, the Group continues to be underpinned by its Malaysian operations with revenue contribution of RM1.00bn (+62.1% YoY, +10.9% QoQ). The stronger sequential performance is reflective of the Group continuing to make headway in the securing of new order flows from an existing key customer. The Group has now included a Singaporean segment, but which is in fact a client previously classified under its Malaysian operations. The Indonesian operations also performed admirably this 1QFY23, with revenue contribution of RM105.9m (+33.4% YoY, +40.5% QoQ). China remains a drag, with current quarter’s revenue of RM13.0m slumping 59.1% YoY.
• 1QFY23 net profit of RM60.7m (+54.1% YoY, +75.6% QoQ) is somewhat of a return to business-as-usual numbers, with recent quarterly results having been marred by various one-off charges (impairments on investments), unexpected supply chain disruptions and inflationary cost pressures, amongst others. Operating margins are improving, though variations in current product mix are likely to mean FY21 net margins (6.1%) are not likely to be achieved this financial year.
• Outlook. The Group has expanded its capacity in recent quarters, having spent almost RM400m in capital expenditure over the last two years. Orders from key customers are expected to remain healthy over the medium to longer-term, with some of them industry-leaders in their respective consumer spaces and less susceptible to down-trading and/or switching by customers amid an increasingly challenging economic environment. That said, a global recession, if any, will be a dampener on demand, regardless.

Source: PublicInvest Research - 19 Dec 2022