KUALA LUMPUR (May 23): Shares of QES Group Bhd (KL:QES) rose to their highest in 15 months after Public Investment Bank started coverage of the automated test equipment company with an “outperform” rating, citing sharp earnings rebound and clean balance sheet.

QES climbed as much as 12% or eight sen to 73 sen, its highest since Feb 3, 2023. The stock closed at 70 sen after close to 21 million shares changed hands. The counter was also more active than usual with trading volume coming in seven times its the 200-day moving average.

“We expect to see a strong recovery this year on the back of increasing customer base, improved spending by semiconductor-based customers and more advanced equipment to be introduced,” said Public Investment Bank.

Apex Securities, the only other research house covering QES, has a similar “buy” call on the stock. Both have target price of 86 sen, implying potential gain of 25% from current price.

Shares of QES have surged 36% so far this year, tracking a broad rebound in the technology sector from last year’s sharp decline. Semiconductor and its related stocks, in particular, have rallied following US’ plan to double the tariffs on semiconductor imported from China.

QES mainly distributes semiconductor inspection, test and measurement equipment, provides materials and engineering services as well as manufactures optical inspection equipment and automated handling equipment.

The company’s distribution business is “recession-proof” and generates recurring income of between RM55 million and RM60 million each year from maintenance services and upgrades, Public Investment Bank said. Last year, the business contributed more than 30% to QES’ gross profit.

Overall earnings of QES however, have been choppy with a 31% decline in net profit in 2023 and a 36% growth in 2022. This year, QES is expected to rake in net profit of RM19.2 million on revenue of RM269.9 million, according to Public Investment Bank’s forecasts.

While the company started slow in the first three months of the year (1QFY2024) with net profit only making up 10% of its full-year earnings projections, Public Investment Bank is betting that QES will stage a “strong catch-up” in coming quarters.

Current orderbook totalled RM108 million, which would only last the company the next nine months, though the research house expects more orders in the coming months, led by new products in the line-up, and expansion of new suppliers from Germany, Taiwan and China under the distribution division.

Balance sheet of QES meanwhile have been “clean” with net cash of RM67.6 million, Public Investment Bank said. QES has also maintained positive cash flow since its listing in 2018, “signalling prudence on cost management,” the research house flagged.

On valuations, Public Investment Bank noted that its target price is based on 26 times forward earnings, a 10% discount to industry average of 29 times due to its lower earnings base, smaller manufacturing earnings versus peers, and higher risk given the low entry barrier for distribution business.