Record-breaking 3QFY22 lifted 9MFY22 core net profit to RM39m (+>100%) which matched our expectation. Manufacturing is expected to grow at a strong pace riding on the strong chip demand. 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 by end of 4QFY22. We strongly believe that Kobay is poised for a multi-year growth in earnings supported by the healthy pipeline of job orders. We reaffirm BUY recommendation with unchanged TP of RM6.08.

Within expectation. All-time high 3QFY22 core net profit of RM15m (+8% QoQ, +>100% YoY) lifted 9MFY22’s to RM39m (+>100%) which matched expectation accounting for 75% of our full year forecast. 9MFY22 one off items include amortization of deferred income on government grants (-RM203k), PPE disposal gain (-RM130k), fair value gain on financial instrument (-RM93k), forex loss (+RM178k) and fair value gain on other investment (-RM3k).

Dividend. None (3QFY21: None). Kobay Usually Declares Dividend at the End of FY.

QoQ. Top line strengthened by 8% to RM100m thanks to higher contributions from manufacturing (+2%), property development (+1%) and pharmaceutical (+28%). Despite the higher D&A (+36%), core net profit gained 8% to RM15m thanks to lower finance expense and effective corporate tax rate (3QFY22: 25% vs 2QFY22: 29%).

YoY. Sales leaped by 1.8x attributable to (i) higher contributions from manufacturing (+107%) and property developments (+123%); and (ii) consolidation of pharmacy business. In turn, bottom line swelled by 1.2x although D&A was higher by 70%.

YTD. Apart from the consolidation of pharmacy business, turnover more than doubled to top RM259m driven by the expansions in both manufacturing (+84%) and property development (+20%). In turn, core earnings gained 2.2x to RM39m.

Regional breakdown. For 9MFY22, Malaysia remains the largest top line contributor with 76%, followed by Singapore, USA, China/Hong Kong and others with 8%, 7%, 6% and 3%, respectively.

Outlook. Manufacturing is expected to deliver promising results riding on the strong demand for semiconductor. In addition, Kobay is in the final stage of setting up a new plant to cater for the manufacturing of aluminium frames for solar panels for renewable energy-related businesses, further expand the clientele exposure and ultimately elevate the performance of this division. The new plant is expected to commence operation by end of 4QFY22. Property development segment is expected to recover gradually on the back of a more positive outlook following the completion of Langkawi Projects by end of 2022, resumption of more economic activities from the country’s transition to endemic status and reopening of international borders to attract foreign buyers. 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. Unchanged.

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

Source: Hong Leong Investment Bank Research - 20 May 2022