CEO Morning Brief

As D&O's Earnings Bottom Out, Analysts Mixed on Outlook and Valuation

Publish date: Tue, 28 Nov 2023, 08:49 AM
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TheEdge CEO Morning Brief

KUALA LUMPUR (Nov 27): The strong rebound in D&O Green Technologies Bhd’s financial results with record quarterly revenue in the third quarter ended September (3QFY2023) affirmed that the worst is over for the automotive LED manufacturer, according to analysts.

However, they have different views on the outlook of the company in the coming financial year (FY2024), after slashing FY2023 full-year earnings forecasts on the back of higher labour, finance and energy costs incurred this year.

Shares of D&O have rebounded 16% from its trading low of RM3.03 in October in anticipation of the rebound in performance.

At noon market break on Monday, the counter was down three sen or 0.85% at RM3.52, after falling as much as seven sen.

The strong 3QFY2023 recovery had already been priced in by the market, said Kenanga Research, which slashed its earnings forecasts for D&O by 29% to 3.7 sen per share for FY2023 and by 24% to seven sen per share for FY2024.

This is as 9MFY2023 earnings only accounted for 37% of consensus full-year forecast, said the research house.

Kenanga noted the net profit margin declined to 2.8% in 9MFY2023, from 11.4% in 9MFY2022. It also flagged the rich valuation given to the counter.

“We believe its earnings have bottomed out, driven by a gradual return of orders from China, and the stable demand from Europe and the US. Yet, we find it difficult to justify a price-to-earnings ratio (PER) of 51 times and 39 times for FY2024-FY2025, at a 79% and 54% premium respectively to its peer’s averages,” it added.

Instead, it maintained its “underperform” call with an unchanged target price (TP) of RM2.30, based on FY2025 forecast PER of 25 times.

Meanwhile, MIDF Research raised its PER multiple to 40.5 times FY2024 earnings per share of 9.9 sen, from 39.5 times previously, which “reflects the strong rebound in the group’s outlook”.

The research house upgraded its call to “buy” and raised its TP to RM4.03, from RM3.91.

“Upbeat automotive market will continue to fuel the demand for automotive LED,” it said. “The quarterly performance showed that the worst is over. To recall, we alluded that the group was operating at break-even level in 2QFY2023.

“Moving forward, we expect a strong recovery momentum to be seen in 4QFY2023 and beyond. This will be mainly supported by the transition from internal combustion engine to the electric vehicle, especially in the China market,” it said.

PublicInvest Research kept its “outperform” call with unchanged TP of RM4.37, based on FY2024 forecast PER of 35 times, despite having cut its FY2023 earnings forecast by 24% on higher finance, electricity and labour costs seen in the year.

It noted 3QFY2023 gross margin increased from 16.2% to 24% as plant utilisation rebounded from 65% to an estimated level of 76%.

“We leave forward estimates unchanged for the years ahead as we expect these pressures to dissipate,” it said.

PublicInvest also highlighted the setting up of D&O’s new automation production line in Melaka, which aims to produce up to five million units of automotive electronic controllers annually for new energy vehicles (NEVs).

As D&O’s market was hit by slower China vehicle sales in the first half of 2023, its 3QFY2023 results surged 10-fold on-quarter, leading to expectations of stronger results in the final quarter, the research house said.

This is “on the back of encouraging global car sales, driven by introduction of more new electric vehicle (EV) car models and various price cuts and rebates”, it added.

Sales of NEVs in China rose to 767,000 in October, making up 37.4% of total passenger car sales and the highest monthly NEV sales in 2023, PublicInvest Research said. The total car sales in the market rose 10% year-on-year (y-o-y) in October, and the country’s passenger car association expects sales to jump 20% y-o-y in November, it added.

Read also:
D&O Green Technologies 3Q net profit up 15.8% on higher revenue, lower net other expense

Source: TheEdge - 28 Nov 2023

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