Record-breaking 2QFY22 lifted 1HFY22 core net profit to RM24m (+>100%) which beat our expectation. Manufacturing is expected to grow at a strong pace riding on the current chip shortage. In addition, Kobay is in the midst of setting up a new plant to cater for solar aluminium frame production. The new plant is expected to commence operation beginning 4QFY22. 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 but with a lower TP of RM7.88 due to the private placement dilution effect.

Above expectation. All-time high 2QFY22 core net profit of RM14m (+50% QoQ, +>100% YoY) lifted 1HFY22’s to RM24m (+>100%) which exceeded expectation accounting for 53% of our full year forecast. This outperformance was mainly due to stronger-than-expected margin in manufacturing while solar frame project has yet to commence. 1HFY22 one off items include amortization of deferred income on government grants (-RM135k), PPE disposal gain (-RM99k), fair value gain on financial instrument (-RM94k), forex loss (+RM195k) and fair value gain on other investment (-RM376k).

Dividend. None (2QFY21: none). Kobay usually declares dividend at the end of FY.

QoQ. Top line strengthened by 40% to RM93m thanks to (i) higher contributions from manufacturing (+44%) and property development (+90%); and (ii) consolidation of pharmacy business. Despite the higher D&A and effective tax rate (2QFY22: 29% vs 1QFY22: 27%), core net profit gained 50% to RM14m thanks to stronger margin.

YoY. Sales leaped by 2.6x attributable to (i) higher contributions from manufacturing (+119%) and property developments (+7%); and (ii) consolidation of pharmacy business. In turn, bottom line swelled by 2.5x for the same reasons mentioned above.

YTD. Turnover more than doubled t o top RM159m as the expansion in manufacturing (+73%) and the consolidation of pharmacy business, were sufficient to offset the decline in property developments (-9%). In turn, core earnings gained 2.2x to RM24m.

Regional breakdown. For 1HFY22, Malaysia remains the largest top line contributor with 76%, followed by USA, Singapore, Hong Kong and others with 8%, 8%, 5% and 4%, respectively.

Outlook. Manufacturing is expected to grow at a strong pace riding on the current chip shortage. In addition, Kobay is in the midst of setting up a new plant to cater for solar aluminium frame production. The new plant is expected to commence operation beginning 4QFY22. 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 since 1QFY22. Note that the newly acquired Avelon Group (70%-owned) in Aug 2021 comes with profit guarantee of RM25.5m in the course of the next 3 years.

Forecast. We raise FY22-24 PATAMI forecasts by 5%, 5% and 3%, respectively.

Reiterate BUY but with lower TP of RM7.88 (previously RM8.00) after factoring the dilution effect from the private placement exercise. Due to its diverse business structure, we value Kobay using SOP valuation methodology: (i) manufacturing division is valued based on 45x of 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 - 18 Feb 2022