Kobay will focus on their core capabilities in supplying mechanical components for ADS and order visibility remainsrobust for the next 3 months. At this juncture, it is actively exploring for new opportunities to utilize their readily available SMT line. Kobay expects FY23 expansion to be largely driven by the organic growth of the core business with a set target of between 50-80%. The new business segments (solar and EMS) will be an additional bonus for the group. Property development is expected to recover gradually on the back of the completion of Langkawi projects by end-2022. Reaffirm our BUY call with lower TP of RM4.94.

Recap. Kobay registered 4QFY22 core net profit of RM13m (-14% QoQ, +79% YoY) which lifted FY22’s to RM52m (+>100%). Top line more than doubled driven by robust demand from semiconductor and E&E customers as well as maiden contribution from pharmaceutical and healthcare business.

Complete end-to-end solution for advance data server. Recall that Kobay has secured a project for advance data server (ADS) machine in late FY21. We gather that after further discussion with the customer, the SMT portion of the work has been put on a halt and Kobay will focus on their capability of supplying the mechanical components. Recall that Kobay invested RM20m in Innospec, a new SMT services subsidiary, to provide end-to-end complete solution for ADS. At this juncture, the group is actively exploring for new opportunities to utilize the readily available SMT line. We understand discussions have been taking place with 2-3 customers and Kobay is confident that they will able to start utilizing the capacity soon. From management guidance, order visibility for the next 3 months is still robust despite the soft demand from digital currency.

Solar segment. The group is in the final stage of preparation work for its venture into the manufacturing of aluminium frames for solar panels for renewable energy-related business, further expanding its clientele exposure. Kobay has already completed the renovation and installation of the new 15-acre plant dedicated for renewable energy related business. We understand that there has been a slight delay for the authorities’ approval. The group is still awaiting for the electrical connection from the power substation upgrade by TNB before moving ahead with customer qualifications. Note that the lower PATAMI margin in 4QFY22 was due to the set up cost incurred for the solar frame manufacturing project coupled with softness in margin for pharmaceutical.

Core business still standing strong. The core business from manufacturing still contributes healthily as the group benefitted from surge in demand from semiconductor and E&E industries. Management expects FY23 expansion to be largely driven by the organic growth of the core business with a set target of between 50-80%. The new business segments will be an additional bonus for the group, namely the solar segment and EMS. Note that semiconductor and E&E contributed the large chunk of 58% of group revenue, followed by 5% from aerospace and 7% from property segment. Property development segment is expected to recover gradually on the back of the completion of Langkawi projects by end of 2022. In view of the escalating cost of building materials and increase in borrowing costs, Kobay will take measures to mitigate the impact and pace out new launches according to market demand.

Financials. Based on the latest updates on EMS and solar businesses, we lower FY23- 25 earnings forecasts by -19.2%, -13.4% and 12.7%, respectively.

Reiterate BUY with lower TP of RM4.94 (see Figure #1) reflecting the downward earnings revision. Due to its diverse business structure, we value Kobay with a 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 - 12 Sept 2022