While weaker quarters were already anticipated, the sequential drop in the Group’s numbers were worse-than-expected. 4QFY23 net profit only came in at RM20.0m (-63.3% YoY, -50.7% QoQ), contributing to a cumulative FY23 net profit of RM144.5m (-16.7%) which missed both our and consensus estimates at 86% and 93% of full-year numbers respectively. Subdued global demand as a result of monetary tightening has been more pronounced than expected, while costs were also elevated as management continues to maintain its full workforce in anticipation of a recovery in demand, thereby hitting margins. We are compelled to cut FY24/FY25 estimates by 29.5% on average however, as we take a dimmer view on global consumption spending. Nonetheless, we still expect to see steadier earnings growth likely in late FY24 onwards on gradual recoveries. Our Outperform call is retained but with a lowered PE-derived target price of RM1.34 (RM1.69 previously), based on a 15x multiple to a rolled over CY24 earnings.

• 4QFY23 performance. The current quarter was weaker on many fronts – revenue fell 13.8% YoY and 32.4% QoQ due to notably weaker consumption spending, while pretax margins fell to 4.3% (3QFY23: 6.8%) due to elevated manpower costs as management is maintaining its full labor force (in anticipation of demand recovery) despite the weaker capacity utilization currently. The Group’s current headcount is the result of the initially-guided order book and robust forecast from a major customer. Nonetheless, we expect margins to be sustainable at the ~6% level going forward due to the Group’s pricing and cost optimization mechanisms.

• Prospects still encouraging. The Group has taken a near-term hit from subdued global consumption spending, though this is expected to normalize in the coming financial year on the back of an expected easing in monetary tightening. Having spent close to RM100m in capital expenditure over the last one year, the Group is primed to benefit from a resumption in order flows with its readily-available capacity and manpower, timing of recovery notwithstanding. We remain encouraged over the Group’s multi-year earnings growth prospects, underpinned by the expected production of new models which a key customer continues to roll out even amid the apparent (current) abatement in consumer spending.

Source: PublicInvest Research - 31 May 2023