Record-breaking 1QFY22 revenue of RM66m yielded an all-time high core net profit of RM10m (+28% QoQ, +90% YoY), which we deem to be a beat. 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. 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. We raise FY22-24 forecast and reaffirm BUY with higher SOP-derived TP of RM8.00.

Above expectation. Record-breaking 1QFY22 revenue of RM66m (+41% QoQ, +69% YoY) yielded an all-time high core net profit of RM10m (+28% QoQ, +90% YoY) and accounted for 22% of our full year forecast. We deem this performance a beat as (i) HLA is still in the midst of ramp up; (ii) solar frame project will only kick commence contribution in 2HFY22; and (iii) stronger-than-expected margin. 1QFY22 one off items include amortization of deferred income on government grants (-RM34k), PPE disposal gain (-RM37k), fair value gain on financial instrument (-RM54k), forex loss (+RM256k) and fair value gain on other investment (-RM376k).

Dividend. None (1QFY21: none). Kobay usually declares dividend at the end of FY.

QoQ. Top line strengthened by 41% to RM66m thanks to (i) higher contributions from manufacturing (+4%) and property development (+35%); and (ii) consolidation of pharmacy business. Subsequently, core net profit gained 28% to RM10m thanks to favourable revenue mix and lower effective tax rate of 26.6% (4QFY21: 27.1%).

YoY. Revenue leaped by 69% attributable to (i) higher contributions from manufacturing (+32%), more than sufficient to offset property developments contraction (-28%); and (ii) consolidation of pharmacy business. In turn, bottom line swelled by 90% for the same reasons mentioned above.

Regional breakdown. Malaysia remains the largest top line contributor with 80%, followed by USA, Singapore and others with 9%, 6% and 6%, respectively.

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.

Forecast. In view of the outperformance, we raise FY22-24 EPS by 4%, 3% and 3%, respectively.

Reiterate BUY with higher TP of RM8.00 (previously RM7.00). Due to its diverse business structure, we value Kobay using SOP valuation methodology: (i) manufacturing division is valued based on 45x of (previously 40x) FY23 EPS. This multiple is at 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 - 26 Nov 2021