Stripping out i) gain on disposal of PPE (RM0.4m), and ii) net foreign exchange loss (RM4.5m), QES posted 9MFY24 core earnings of RM14m, up 8.5% YoY. The weaker-than-expected results, which made up only 63% of our full-year expectation, were mainly dragged by losses in manufacturing segment and lower deliveries of inspection systems and advanced metrology systems despite an increase in automated handling systems. On the positive note, the group's orderbook has increased from 2QFY24's RM103m to RM108m, indicating an improving sentiment going forward. We cut our FY24-26F earnings forecast by 10%-12% to reflect slower-than-expected equipment deliveries in the near-term. Maintain Outperform with a lower TP of RM0.76 based on 26x FY25 EPS. A first DPS of 0.25sen was declared for the quarter. We like QES given its recession-proof distribution business model and increasing penetration into manufacturing segment to ride on the semiconductor cycle.

• 3QFY24 revenue climbed 7.8% YoY. During the quarter, the stronger sales were led by the distribution segments despite a decline in manufacturing sales. The distribution segment, which made up 87.1% of group sales, saw its sales increase from RM44m to RM50m on the back of a stronger contribution from equipment. Meanwhile, manufacturing sales dropped from RM10m to RM7.5m due to a change in product mix, with lower deliveries of inspection systems though seeing an increase in deliveries of automated handling systems. Key markets such as Malaysia (+38.3%), Vietnam (+40.7%) and Indonesia (+11.8%) contributed to the stronger sales.
• Core profit rose from RM4.4m to RM5.4m. Stripping out the i) gain on disposal of property, plant and equipment (RM0.4m), and iii) net foreign exchange loss (RM4.5m), the group registered core profit of RM5.4m, up 22.7% YoY, mainly driven by distribution segment (+12.8% YoY) while the manufacturing segment made a loss of RM0.6m. We believe the losses in the manufacturing segment was likely due to a pushback in deliveries from its wafer fab customers given the slower-than-expected recovery in semiconductor industry.
• Stronger orderbook. As of end-Oct, the group's orderbook stood at RM108m compared to Aug's RM103m. Out of the RM108m, distribution and manufacturing segments accounted for 82% and 18%, respectively. The stronger orderbook size indicates its capability in securing more contracts albeit pending on timing of shipments.

Source: PublicInvest Research - 19 Nov 2024