Manufacturing is expected to grow at a strong pace riding on the current chip shortage. For HLA, Kobay has successfully on boarded a new subsidiary, Innospec, to provide SMT services. This would enable the group to ramp up production to 40k units/month. As for solar segment, the group targets to commence production beginning 4QFY22 for high volume solar frame. Property development segment is expected to contribute more as economic condition normalizes. We expect the new income stream from the pharmaceutical segment to contribute positively in in line with profit guarantee. Reaffirm BUY with unchanged SOP-derived TP of RM7.88.

Recap. Kobay chalked in all-time high 2QFY22 core net profit of RM14m (+50% QoQ, +>100% YoY) and lifted 1HFY22’s to RM24m (+>100%). This surge was bolstered by multi-segment growths in (i) stronger semiconductor and E&E demands for manufacturing; (ii) increased progress billings for property development; and (iii) positive contribution from pharmaceutical segment.

Complete end-to-end solution for advance data server. 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; (ii) mechanical components; and (iii) SMT. We gathered that the group has successfully supplied mechanical components part in 2QFY22 and scheduled to start supplying electrical components in 3QFY22. At this juncture, HLA operation is facing some hiccup due to motherboard shortage hence the run rate is lower at 20k units/month. To mitigate this, Kobay has on boarded Innospec as a new subsidiary to provide SMT services. This would enable the group to supply 40k units/month of end-to-end solution for advance data server customer.

Solar segment. Kobay targets to commence production for high volume solar frame project beginning 4QFY22 at the newly-acquired 15-acre plant that is earmarked for the manufacturing of green energy products. We understand that the slight postponement from initial target of production was due to the power substation upgrade delay. Positively, the potential client prospect is looking bright and the group currently producing prototype for the second solar customer based in China.

Outlook. The existing business is growing organically across semiconductor, E&E and aerospace. Aerospace recorded 10% in sales for 2QFY22 and the remaining was contributed by main Customer I. We understand that the group has recently secured new contract for supplying tester machine from Customer I. Furthermore, we gather that one of the subsidiaries, KT Micro has been granted a pioneer status for the system integration and standard equipment. Additionally, the new SMT subsidi ary Innospec, is in the process of applying pioneer status. Should this materialize, this will benefit the group with further tax savings. Property development segment is expected to contribute more as economic condition normalizes. We expect the new income stream from the pharmaceutical segment to continue contributing positively. 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.

Financials. Unchanged.

Reiterate BUY with TP of RM7.88. 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 - 21 Feb 2022