During the recent briefing, management expressed concerns over the increasing risk of a global recession, as some customers are now planning to hold back spending on capital expenditure (capex), while also seeing some delays in delivery of orders. To mitigate the risk of high dependency on single customer in Integrated Production Systems (IPS), the group plans to diversify its Standalone Automated Equipment (SAE) product offerings with more new customers, focusing on standard products instead of customized products. All told, we continue to remain confident of the Group’s longer-term prospects and maintain our Outperform call with an unchanged TP of RM1.12 based on 35x FY24 EPS.

• 1QFY23 results review. The Group would have recorded all-time high quarterly earnings of RM4.8m if not for the one-off listing expenses of RM0.7m. The strong gross profit margin of 58% is mainly attributed to the delivery of machine (a sophisticated automation project skewed towards the software programming, which involves audio-visual (AV) processors) to a new customer, which is a contract manufacturer for a front-end wafer fabricator in Batu Kawan. However, the core profit margin weakened from 53% in 4QFY22 to 45% due to increasing cost of hiring more engineers, which is reflected in the administrative expenses.

• SAE set to dominate Group sales. The group’s current orderbook stands at RM15m over the next 3-6 months with 70% from SAE and remaining 30% from the IPS segment. Sales from SAE, also known as automated test equipment are expected to jump by more than 50% this year, boosted by the robust demand from the automotive/EV industry. Management sees a strong pick-up in 2H sales compared to 1H given that the customer’s capex spending will only kick in somewhere around May-June while the blended net profit margin is expected to be in the range of 30%-35%.

• Expanding its product offerings. Management plans to focus on standard products instead of customized products as the turnover is faster and the collection period is shorter for the standard products like visual inspection machines and insulated-gate bipolar transistor, which are the key equipment for the Electric vehicle (EV) industry. The requirement for the EV industry is more stringent in terms of inspection for all the semiconductors. As all semiconductors have different kinds of design modules, it requires different kinds of inspection machines, triggering the demand for all these new applications. If the feedback is positive, there is a high possibility it will receive repeat orders from the customer especially for other operating countries. To note, some of these developed machines can combine multiple functions into one inspection machine, making it more cost effective for customers. On a separate note, management has also set its sights on the aerospace and automated storage and retrieval system warehouse industries.

Source: PublicInvest Research - 3 Apr 2023