Kobay has been awarded the end-to-end outsourcing advance data server project. Although the order is lower at 40k unit/month, the ASP for the total solution is 4x higher with rewarding margin. With oil price sustaining at multi year high levels, the global demand for renewable energy will be even greater going forward and Kobay will be an indirect beneficiary. Customer I’s announcement of a multibillion investment in Penang to expand its existing facility is a boon, potentially elevating to Kobay to the next level. Reaffirm BUY with lower SOP-derived TP of RM6.08.

A roller coaster ride. Post the remarkable 2QFY22 results, share price was hammered down 45% to an intraday low of RM2.54 followed by a V-shape recovery after investors reassess the inflationary economy with more clarity on rate hike roadmap by US Fed and the impact of Russia-Ukraine war on global semiconductor supply chain. As such, we met up with management to get the latest updates and below are the key takeaways.

Advance data server. Kobay kicked off this project last year with a sole job scope of high level assembly (HLA) with a target output of 60k unit/month. However, production was limited to 20k unit/month ever since as SMT suppliers were not able to deliver the committed motherboard volume. In order to eliminate this dependency, the customer has awarded Kobay end-to-end outsourcing which comprises of 3 parts: (i) HLA; (ii) mechanical components; and (iii) SMT. Although the order is lower at 40k unit/month, the ASP for the total solution is 4x higher with rewarding margin. Kobay has begun supplying mechanical components in 2QFY22. Targeting to commence in 3QFY22, it is installing 2.5 SMT lines to meet the demand of 20k unit/month and outsource the remaining 20k unit/month to a partner.

Green energy. Kobay targets to start production of high volume solar frame project at the newly-acquired 15-acre plant beginning 4QFY22. The slight delay from initial target was due to the power substation upgrade delay. Currently, Kobay continues to serve the US-based client from existing plant and prototyping with a China-based customer. The surge in raw material price will not impact Kobay as the cost is fully passed on to the customer. As oil price is stubbornly sustaining at multi-year high levels, the global demand for renewable energy will be even greater going forward and we think that Kobay will be an indirect beneficiary.

Customer I. Kobay is one of the few trusted suppliers of Customer I in Penang and the business relationship has stretched for more than 20 years. Orders from Customer I have picked up materially in recent months and expected to be robust going forward. We believe that Customer I’s recent announcement of multibillion investment in Penang to expand its existing facility is a boon, potentially elevating to Kobay to the next level.

Others. Property development is expected to contribute more as economic conditions normalise. The newly-acquired Avelon Group (70%-owned) in Aug 2021 continues to contribute positively in line with 3-year profit guarantee of RM25.5m.

Forecast. Revise revenue projection base on the expanded job scope for advanced data server. In turn, FY22-24 EPS are raised by 10%, 32% and 20%, respectively.

Maintain BUY but with lower TP of RM6.08 (previously RM7.88). Due to its diverse business structure, we value Kobay with SOP valuation methodology: (i) manufacturing division is pegged to 25x (previously 45x) of FY23 EPS; (ii) property development business is valued using FY21 net book value; and (iii) pharmaceutical business is appraised based on 20x (previously 25x) of FY23 EPS.

Source: Hong Leong Investment Bank Research - 24 Mar 2022