While it is diversified (with property development and pharmaceutical), Kobay’s core and largest business is manufacturing with presence in semi/E&E, aerospace, medical/life science and O&G sectors. The bullish global semi market outlook and upbeat equipment spending bodes well for Kobay. Besides, it is viewed as a prime beneficiary of order diversion amid US-China trade tension. It is embarking on an expansion plan for high-precision engineering, HLA and new green energy businesses. Strengthening USD is a boon as part of its sales are denominated in USD. Initiate Kobay with a BUY with SOP -derived TP of RM7.00.

Diversified with manufacturing a as core. Kobay’s manufacturing arm is the largest contributor serving clients from semiconductor/E&E (75% of sales), aerospace (11%), medical/life science (3%) and O&G (11%). In 2016, it ventured into property development with its maiden project in Langkawi. In 2021, Kobay further diversified into the pharmaceutical business via the acquisition of 70% stake in Avelon Group.

Bullish global semiconductor market outlook. 1H21’s 24% growth to USD257bn is on track to record another all-time high revenue. We expect the industry to see a seasonally stronger 2H and end 2021 closer to +20%. As for 2022, the sector is expected to be in expansionary mode with 9% uplift, creating 2-consecutive recordbreaking years.

Upbeat global semiconductor equipment spending. Capital investment was exceptionally strong in 7M21 with 46% gain in 3MA billings to USD24 bn. We expect investment outlay to stay elevated over the next few years. Based on SEMI’s latest forecast, order visibility has stretched to 2022 boosting the total equipment market size to reach circa USD100bn, implying an astonishing 19% CAGR for 2019-2022.

Trade decoupling. Kobay is a prime beneficiary of order diversion amid US-China trade tensions. It is not surprising that activities in the computer and electronics industries are showing the largest shift away from China as they are the most vulnerable to a disruption of the international supply chain. The compounding conflict will further disrupt long-running economic ties and force product/brand owners to reassess their outsourcing supply chain strategy.

Solid expansion pipeline. Kobay continues to add production capacity on the back of strong orders. It has ordered additional 10 CNC and will begin contribution in FY22. Promising outlook on HLA business also propelled Kobay to expand rapidly with a plan to reuse a vacant factory with 54k sqft build-up on a 2-acre land. It has acquired a property in Seberag Prai earmarked for the production of green energy products.

Favourable forex. USD is projected to appreciate with an average of RM4.23/USD in 2H21 compared to 1H21's RM4.10/USD. As such, we expect Kobay to experience positive boost as part its sales are denominated in USD proceeds.

Financials. We are projecting Kobay’s revenue to experience a multiyear growth cycle with FY20-24 CAGR of 31% on the back of (i) manufacturing expansions in precision engineering and HLA; (ii) new contribution from green energy products; and (iii) consolidation of pharmaceutical business. In turn, this is translated into an even stronger core PATAMI 4-year CAGR of 33%.

Initiate with BUY with TP of RM7.00. Due to its diverse business structure, we value Kobay using SOP valuation methodology: (i) manufacturing division is valued based on 40x of FY23 EPS. This multiple is at 17%-20% discount to what we ascribed to its peers under our coverage; (ii) property development business is valued using FY21 net book value; and (iii) pharmaceutical business is appraised based on 25x of FY23 EPS, in line with industry peers.

Source: Hong Leong Investment Bank Research - 27 Aug 2021