Scomnet Technologies Berhad (SCOMNET) principal activities include manufacturing and sub-assembly of wires and cables for the electrical appliances, consumer
electronics and automotive markets, and specialises in the conception and manufacturing of original equipment manufacturer (OEM) medical cable assemblies. The group derives >60% of its revenue through its wholly-owned subsidiary Supercomnet Medical Products Sdn Bhd which is involved in medical cable assemblies.

YTD, SCOMNET stock performance had been lacklustre, sliding 21% to RM1.45 (vs KLCI -1.6%), weighed down by below market expectation earnings as unpredictable events kicks in: 1) higher raw material cost (Copper price +27% YTD); 2) limited workforce allowed during the MCO3.0; 3) elevated freight rates. Nevertheless, we reckon the market had fully digested the short-term headwinds as the company forged strategies to address the negative impact by stringent cost controls and pass on the price hikes along to customers (1QFY21 PAT margin: 13% compared to 2QFY21 PAT margin: 16.52%).

Currently, SCOMNET is trading at an undemanding 22.8x FY22E P/E (32% discount against 5 years average of 33.6x) together with impressive FY21-FY23 EPS CAGR of 51%, on the back of its high barrier of entry medical cable divisions which gross margin (>45%) is way higher than normal electronic wire cable.

Overall, we believe SCOMNET’s prospects are likely to improve in 2H21, underpinned by: (1) Production of NAZA PSA to commence in Aug21; (2) Strong order visibility from medical divisions due to more product launches in the coming months; (3) relaxed SOP which allowed factories to ramp-up their production in the coming months.

Technically, SCOMNET is grossly oversold and building a sound base RM1.40-1.45 territory. Any weakness from current price towards key supports of RM1.40 level provides a good opportunity to accumulate. A strong breakout above RM1.55 (0.28 FR) will spur price higher to RM 1.50-1.65 levels. Cut loss at RM1.38.