Brief profile. SCOMNET’s principal activities include manufacturing and sub-assembly of wires and cables for the electrical appliances, automotive markets, and specialises in the conception and manufacturing of OEM medical cable assemblies. The group derived 64% of its revenue from medical product in 2020 whilst automotive and E&E products accounted for 5% and 31%, respectively.

Superior margins of medical products to drive earnings growth. Being the key growth engine that commands the highest margin among other segments (SMP: 25- 30% vs Automotive: 15-18%), Supercomal Medical Products Sdn.Bhd (SMP) is deemed to be the crown jewel, making SCOMNET an excellent proxy to ride on the lucrative healthcare business. To recap, SCOMNET ventured into the medical space in 2018 by setting up SMP to supply critical medical components to global healthcare vendors such as Edwards Lifesciences, Ambu Medical etc. Over the years, SCOMNET has transformed SMP into a full-fledged medical device contract manufacturer, and cementing close collaborations and bonding with its strategic customers from R&D, prototyping, pre-production, commercial production as well as sharing R&D and machinery costs. This would enable SCOMNET to roll out new products and expansions plans without incurring huge capex. The latest development is in line with SCOMNET's push to expand into new markets and acquire new clients and diversify its corporate footprint globally.

For FY22/23, SMP’s growth will be supported by several new medical products, namely: (i) Mermaid’s D*Clot; (ii) AMBU GI SCOPE, (iii) PLASS Rescue Occluder, (iv) Innovative Health Sciences (IHS) syringe infusion system, which commands higher margins vs the existing products. In particular, the IHS syringe infusion system is the first-ever non-electric infusion pump for both intravenous and subcutaneous routes of administration. The syringe infusion system has received CE mark and FDA approval in 2021, and is expected to start contributing to earnings from 2QFY22. Overall, management expects IHS to contribute c.20% of Group revenue, making it the 3rd largest Customer After Ambu and Edward Lifesciences.

Under-appreciated. After registering a 5-year uninterrupted earnings growth, we reckon SCOMNET is on track to post another strong earnings in FY22/23, underpinned by (i) new income streams from new medical products; (ii) commencement of fuel tank production for automobile client Naza PSA from 4Q21 onwards; (iii) near-term capacity expansion.

That said, SCOMNET’s share prices performance have been lacklustre, plunging -30% YTD (vs Healthcare index: -8% YTD), and is trading at undemanding 19.7x FY23 P/E (48% and 23% discount against 5-year average of 38x and 25.6x, respectively).

Cup and handle. Technically, SCOMNET is pending for a cup and handle neckline breakout. A successful breakout above RM1.40 will indicate a new uptrend leg had happened and spur the prices toward RM1.53-1.60-1.72. Cut loss at RM1.26.

Source: Hong Leong Investment Bank Research - 6 Apr 2022