We like QES for its exclusive distributorship for reputable brands of equipment, large customer base from diverse industries, widely spread distribution network across most of the ASEAN countries, expansions to new industries and strong recurring income. Valuation is undemanding at trailing 14.9x P/E (31% below peers), Technically, the stock is poised for a bullish triangle breakout towards long term targets at RM0.31-0.35.

Small but commendable. Since its inception in 1991, QES (listed in Mar 2018) has secured over 2,400 customers with over 8,000 units of equipment sold. The majority of its customers are multinational corporations in the semiconductor, E&E as well as automotive industries. Via its subsidiaries, QES has direct distribution networks in Malaysia, Indonesia, Vietnam, Hong Kong, Singapore, Thailand and the Philippines. Beyond that, it also collaborates with appointed dealers and distributors in Singapore, France, Taiwan and Germany. We expect its customer base to gradually expand over the next 1-3 years, as management is on an active lookout for new business opportunities such as the petrochemical as well as pharmaceutical industries.

Well positioned in the growing industries. QES has registered a 2015-2017 core earnings CAGR of 47%, which have significantly outperformed the mid-single digit growth of global/Malaysia’s test and measurement markets. These were all on the back of its strategic exposure in high-growth sectors in teleco (wider adoption of 4G/new 5G technology), semiconductor (IoT as well as electronic devices) and automotive (higher electronic content) couple diwth the resilient ASEAN markets. With QES established customers and wide installed base and expectations of strong recurring income in future leveraging on its sturdy sales over the past 2-3 years, the group is expected to rake in a FY17-19 earnings CAGR of 33% (based on consensus) in FY19 to RM16m (9MFY18 earnings was RM11m).

Poised for a triangle breakout. QES has been holding up well above the LT support trendline since Mar 2018. A decisive breakout above immediate resistance of downtrend line resistance at RM0.29 will increase the likelihood of the resumption of further advance towards RM0.31 (50d SMA) and our LT objective of RM0.35 (22 Oct high). Meanwhile, key supports are situated at RM0.27 (23.6% FR) and RM0.26 (100d SMA). Cut loss at RM0.25.

Source: Hong Leong Investment Bank Research - 27 Nov 2018