ECA Integrated Solution (ECA) reported core earnings of RM7.6m for 1HFY23 on the back of higher number of deliveries for integrated production systems (IPS) and standalone automation test equipment (ATE), though more notably in 1QFY23. The strong set of results, which made up 51.7% of our full-year forecast, almost equaled the full-year earnings of FY22. In view of stronger contributions expected from the standalone automation equipment segment in the 2H, we do not rule out the possibility of positive earnings surprises for FY23. Maintain Outperform with an unchanged TP of RM1.12 based on 35x FY24 EPS. No dividend was declared for the quarter.

• 2QFY23 revenue weakened 12.3% QoQ. During the second quarter, revenue slipped from RM10.6m in 1QFY23 to RM9.3m, mainly due to lower number of deliveries for integrated production systems. Of the RM20m sales recorded in 1HFY23, ATE and IPS segments contributed 50.5% and 45.8%, respectively. The remaining 3.7% was derived from the after sales service segment. In terms of industry breakdown, automotive/ EV accounted for 60.7% of the total group sales while consumer electronic made up the remaining 39.2%. Meanwhile, the Group’s bottomline in 2QFY23 dropped from RM4.1m to RM3.5m in line with weaker sales. Meanwhile, net margin slipped from 38.7% to 37.8%.

• Update on the IPO proceeds. Of the RM25.5m raised from the listing exercise, ECA has utlised 83.9% (previously 44.7%) or RM21.4m. Majority of the proceeds are earmarked for acquisition of new advanced machinery to bolster its production capabilities as well as for working capital purposes in order to undertake larger customer orders.

• Outlook guidance. For FY23, management is looking at contribution of 30%-40% from the integrated production line (IPS), with standalone automated equipment making up the remaining 60%-70%. Almost 60% of its sales are derived from the automotive industry, and the remaining 40% from the semiconductor industry. In view of stronger orderbook from the customized equipment, we expect to see higher margin of 33%-35% this year. Meanwhile, the Group has been targeting to expand its customer base for the IPS segment as it currently only serves 2 key customers.
  
  On product development, ECA remains focused on the automated optical inspection (AOI) machine for 2 new customers. Assuming no delays, sales contribution from the standalone automation equipment segment is expected to pick up in the 2HFY23, led by the delivery of at least 20 units of vision inspection machine. With current facilities, the plant can produce 6 machines every 2 weeks. We also understand the Group has been receiving increased number of customer inquiries for automation solutions. All-told, we expect to see robust growth for the group earnings this year.

Source: PublicInvest Research - 27 Jun 2023