SFP recorded 2Q22 core net profit of RM7.2m (+5% QoQ, not disclosed YoY) and 1H22 core net profit of RM14.1m – which came in above expectations at 57%/56% of ours/consensus full-year forecasts respectively. We believe that the key variance against our estimates were mainly due to better-than-expected contribution from both of the group’s CNC machining and AES segments (post acquisition of EEASB), which was completed on 18 March 2022. We raise our FY22-24f estimates by 15%, 26% and 38% respectively after increasing our blended utilisation rate assumptions for its CNC machining segment. Following the stellar performance in the group’s share price since its debut on 20 June 2022 by 287% (IPO price: RM0.30/share), we downgrade SFP Tech to HOLD with a higher TP of RM1.11/share (from Buy with a TP of RM0.63/share previously) as we believe that positives have been pretty-much priced in at current levels.

Exceeded expectations. SFP recorded 2Q22 core net profit of RM7.2m (+5% QoQ, not disclosed YoY) and 1H22 core net profit of RM14.1m – after having adjusted for: (i) RM1.8m of forex gains; (ii) RM1.6m gain on acquisition; and (iii) RM2.3m of one-off listing expenses. We deem the results to be above expectations at 57% and 56% of ours and consensus full-year forecasts respectively. Key variance against our estimates was mainly due to better-than-expected contribution from both of the group’s CNC machining and Automated Equipment Solutions (AES) segments.

Dividend. First interim dividend of 0.5sen/share (ex-date: 9 Sept 2022, payment: 28 Sept 2022) was declared – which was a positive surprise. We now project a dividend payout policy of 25% for SFP Tech.

QoQ. 2Q22 core net profit was up 5% QoQ, mainly attributed to a major increase in revenues for its CNC machining (+18% QoQ) and AES (+63% QoQ) segments. We believe that the notable spike in SFP Tech’s AES segment was due to the consolidated contribution post-acquisition of EST Exhibit Automation Sdn Bhd (EEASB), which was completed on 18 March 2022. We note that blended core net margins shrunk slightly by 4.0ppts in 2Q22 as AES typically yields lower profitability margins.

YoY/YTD. Not Disclosed.

Outlook. We opine that SFP is on-track to register back-to-back record high profits annually in FY22-24f attributed to: (i) positive contribution from EEASB; (ii) completion of Manufacturing Plant 3, which will comprise a 3-storey factory and warehouse with a 3-storey office building with a built-up area of approximately 319.2k sq ft (which essentially triples the group’s total current built-up area of 152.5k sq ft); and (iii) the addition of 41 new CNC milling machines over the next 3 years. This would add to its number of machines and cumulatively increase the group’s maximum manufacturing production capacity by approximately 25.3% from 520.4k hours/year to 652.1k hours/year.

Forecast. We raise our FY22-24f estimates by 15%, 26% and 38% respectively after increasing our blended utilisation rate assumptions for its CNC machining segment.

Raise TP to RM1.11 but downgrade to HOLD. Following the stellar performance in the group’s share price since its debut on 20 June 2022 by 287% (IPO price: RM0.30/share), we downgrade SFP Tech to HOLD with a higher TP of RM1.11/share (from Buy with a TP of RM0.63/share previously) as we believe that positives have been pretty-much priced in at current levels. Our TP is pegged to a forward multiple of 25x on FY23f earnings – which is at a deep c.25% discount to its peers’ weighted average one-year forward P/E multiple of 34x (see Figure #3) to reflect: (i) its listing on the ACE market, rendering it less investible to most institutional investors; and (ii) its relatively smaller market capitalisation vs. its peers.

Source: Hong Leong Investment Bank Research - 22 Aug 2022