• Within expectations. EG Industries’ 3QFY18 core net profit came in at RM4.8m (+9.0% qoq, -28.1% yoy), bringing 9MFY18 numbers to RM17.3m (-23.3% yoy), accounting for 82% of our full-year estimate. We deem the results to be within our expectations as we anticipate a seasonally weaker 4Q. Note that we have excluded a RM0.6m net forex loss arising from the strengthening of the ringgit in our 3QFY18 core earnings forecast.
• Higher revenue offset by challenging operating environment. 3QFY18 revenue rose marginally yoy by 1.2% as higher orders from consumer electronic products successfully fended off the decline in sales volume of data storage products. That said, EBIT plunged 31% yoy to RM6.1m on the back of: a) shrinking margin amid a stronger ringgit, b) higher depreciation costs arising from increase of machineries which are not optimally utilised yet, and c) longer raw material lead time. Note that 3QFY18 revenue mix for PCBA and box-build segment stood at 79.8% and 20.2% respectively (3QFY17: 40.3% and 59.7% respectively).
• Outlook. The group has recently commenced its third business segment of distribution, in line with its aspiration to achieve vertical integration. We understand that its first distribution business was tasked by Flic (a box build customer) as the Sweden-based company aims to penetrate Southeast Asia. Nevertheless, we think EG would probably need a longer timeline until it secures material contract wins.
• Maintain FY18 earnings forecast but cut FY19-20F profit forecasts by 11-22% as we expect lower orders from a box build customer.
• Maintain HOLD with a lower target price of RM0.52 (previously RM0.63), pegged to 8x 2019 fully-diluted PE. We believe the PE multiple discount to the sector’s 15.5x PE is fair, considering EG’s more leveraged balance sheet (net gearing of 0.4x vs peers’ average of 0.04x) and anaemic ROE of 7% (sector: 22%). Our HOLD call is mainly based on a balance risk/reward profile. EG currently trades at 5-year mean PE. Entry price: RM0.47.

Source: UOB Kay Hian Research - 1 Jun 2018