PMB Technology Berhad (PMBT) core profit of RM11.9mn slipped by 86.7% in 1H23, mainly due to lower contribution from all segments. This result fell short of both our projections and consensus expectations, representing only 4.7% of the full-year forecast. Given the company's expansion strategy, it has refrained from declaring any dividends. Looking ahead, we anticipate a continued decline in global silicon metal prices and predict a return to the conventional earnings patterns resembling those observed prior to China's production reduction in mid-2021. Despite our optimism regarding the gradual economic reopening, we remain cautious in light of persistent inflationary pressures and stringent financial conditions. Hence, downgrade to SELL call on PMBT with lower TP of RM1.11 based on PER of 18x that is pegged to FY24F EPS of 6.18 sen.

• Below expectations. 1HFY23 net profit of RM11.9mn (-86.7% YoY) was below ours and consensus expectations, with both accounting for 4.7% of full year forecast.

• Dividend. No dividend was declared in view of its ongoing expansion plan.

• QoQ. PBT fell 72.7% to RM3.8mn, in line with 18.6% dropped in revenue to RM223.9mn, mainly due to lower contributions from both segments during the current quarter, on account of higher raw material and operating cost. As a result, there was a compression of the margin by 3.4 ppts QoQ.

• YoY. Top-line plummeted by 14.0% YoY mainly due to lower turnover contribution from Manufacturing & Trading segment (2Q23:RM149.4mn vs 2Q22:RM182.1mn). The drop in selling price and tonnage sold, higher raw material and operating costs has led to a significant decline of 79.6% in segment earnings compared to the previous year (2Q23:RM9.3mn vs 2Q22:RM45.6mn). Concurrently, earnings declined 93.8% in tandem with lower PBT and higher tax expenses (2Q23:44.7%, 2Q22:18.3%).

• Outlook. With the global silicon metal price expected to decline further in 2Q23, we anticipate a normalization of earnings similar to the period before the production cut in China during mid-2021. It is noteworthy that supply chain disruptions have started to alleviate, leading to recoveries in specific sectors, including electric vehicles (EVs), solar energy, automotive, and construction, as a response to the gradual reopening of economies. However, we maintain a cautious stance on the global economic outlook due to ongoing inflationary pressures and increasingly stringent financial conditions.

• Forecast. We tweak our FY23F/FY24F earnings forecast lower by 88%/67% to RM29.7mn/RM76.9mn, to reflect our updates in operating costs and a decrease in the selling price of metallic silicon.

• Our call: Downgrade to a SELL call on PMBT with lower TP of RM1.11 (from TP of RM3.63 previously) as we roll our valuation to FY24. This is based on PER of 18x and EPS of 6.18 sen.

Source: BIMB Securities Research - 29 Aug 2023