Apart from the recoveries of aerospace and O&G divisions, manufacturing segment’s FY22 growth will be driven by the contributions from advance data server HLA and solar frame production. Property development segment is expected to contribute more as economic condition normalizes. We expect the new income stream from the pharmaceutical segment to start contributing positively in 1QFY22 in line with profit guarantee. With the resumption of operations to 100% capacity, we strongly believe that Kobay is poised for a multi-year growth in earnings supported by the healthy pipeline of job orders. Reaffirm BUY with unchanged SOP-derived TP of RM7.00.

Recap. 4QFY21 revenue of RM47m yielded a core net profit of RM7m (+6% QoQ, +26% YoY) which brought FY21’s total to RM25m (+8% YoY). Manufacturing segment was the main contributor to the improvement thanks to (i) rising demand from semiconductor/E&E; (ii) favourable higher-margin product mix from semi/E&E; and (iii) turnaround of aerospace business.

Advance data server project. Recall that Kobay has secured a project for advance data server machine in late FY21. The entire scope of work for this project comprises of 3 parts: (i) high level assembly (HLA, accounts for 25% of ASP); (ii) mechanical components (accounts for 25% of ASP); and SMT (accounts for 50% of ASP). At this juncture, the HLA operation is ramping up rapidly and expect to hit 60k units/month by end-2021 despite the higher demand of 100k units/month from the customer. Kobay plans to commence the fabrication of mechanical components once the operation of the new factory stabilizes which is expected in 2HFY22. As for SMT, we understand that the parts will be consigned by the customer and Kobay is exploring ways to fulfil this job scope.

Additional capacity to support growth. Kobay targets to complete the renovation works and equipment installations of the new 15-acre new factory by Dec 2021. This property is earmarked for the manufacturing of green energy products. The operation is planned to commence in FY22 for high volume solar frame production with target of 2k tonnes/month. Currently, the group is in discussions with another 3 potential clients with order sizes similar to the existing solar customer. We understand the auditing will be done in Dec 2021 and management targets for this to ramp up to 4k tonnes/month by FY23.

Outlook. Apart from the recoveries of aerospace and O&G divisions, manufacturing segment’s FY22 growth will be driven by the contributions from advance data server HLA and solar frame production. Property development segment is expected to contribute more as economic condition normalizes. We expect the new income stream from the pharmaceutical segment to start contributing positively in 1QFY22. Note that the newly acquired Avelon Group (70%-owned) in Aug 2021 comes with a profit guarantee of RM25.5m in the course of the next 3 years. With the resumption of operations to 100% capacity following the successful PIKAS vaccination programme, we strongly believe that Kobay is poised for a multi-year growth in earnings supported by the healthy pipeline of job orders.

Financials. Unchanged.

Reiterate 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 - 18 Oct 2021