While 1QFY23 core earnings of RM11m was rather light, we deem the results to be in line as it was impacted by high set up cost from the new renewable -energy manufacturing plant which has yet to generate revenue . Manufacturing is expected to grow on the back of existing demand from customers in E&E industry. Pharmaceutical division shall continue to work on widening its product range, along with cost control efforts to improve profitability and market competitiveness. We reaffirm BUY call with unchanged TP of RM4.94.

Within expectation. 1QFY23 revenue of RM89m (-6% QoQ, +35% YoY) yielded a core net profit of RM11m (-18% QoQ, +15% YoY), accounting for 17% of our full-year forecast. Although this came in rather light, we deem this to be in line as it was impacted by high set up cost from the new renewable-energy manufacturing plant which has yet to generate revenue. 1QFY23 one off items include amortization of deferred income on government grants (-RM34k), PPE disposal gain (-RM81k) and forex loss (+RM488k).

Dividend. None (1QFY22: None).

QoQ. Top line weakened by 6% to RM89m attributable to the decline in manufacturing (-10%), more than sufficient to offset the gain in pharmaceutical (+2%), while property development was flat. Manufacturing division experienced softer new orders and O&G business segment underperformed. In turn, core net profit fell by 18% to RM11m mainly due to high set up cost from the new manufacturing plant.

YoY. Revenue surged 35% thanks to higher contributions from 3 major business segments. Manufacturing gained 27% to RM58m driven by the demand from semiconductor and E&E industries. Property development performance rose 236% to RM10m largely arising from construction progress for current ongoing project. Pharmaceutical and healthcare products division grew 24% to RM21m as 1QFY22 only captured 2-month contribution upon completion of the acquisition in Aug 2021. Yet, bottom line expanded at a slower pace of 15% impacted by higher pre-operation cost from the new manufacturing plant.

Regional breakdown. For 1QFY23, Malaysia remains the largest top line contributor with 76% (1QFY22: 80%), followed by Singapore, USA and others with 12%, 6% and 7% (1QFY22: 6%, 9% and 6%), respectively.

Outlook. Kobay anticipates manufacturing growth momentum will be slower compared to FY22 in view of the weaker global growth. While maintaining the existing demand from customers in E&E industry, the division will further expand the clientele exposure into renewable energy-related business, rationalizing manufacturing footprint and improve overall cost structure. Property development is expected to deliver positive performance on the back of the completion of its maiden Langkawi Project. 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. Pharmaceutical shall continue to work on widening its product range, along with cost control efforts to improve profitability and market competitiveness.

Forecast. Unchanged.

Reiterate BUY with unchanged TP of RM4.94 (see Figure #2). 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 - 17 Nov 2022