1HFY23 core net profit of RM21m (-12% YoY) was a disappointment due to under delivery by the manufacturing division, which was also impacted by 2 new projects that are in incubation stage. Manufacturing performance is expected to be soft amid a weak global economy. 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 a lower TP of RM4.00.

Below expectation. 2QFY23 revenue of RM82m (-8% QoQ, -12% YoY) yielded a core net profit of RM10m (-7% QoQ, -29% YoY) which brought 1HFY23’s sum to RM21m (- 12% YoY), accounting for 33% of our full-year forecast. This underperformance was mainly due to under delivery by the manufacturing division, which also impacted by 2 new projects that are in incubation stage. 1HFY23 one off items include amortization of deferred income on government grants (-RM68k), PPE disposal gain (-RM81k) and forex loss (+RM1.6m).

Dividend. None (2QFY22: none). Kobay usually declares dividend at the end of its FY.

QoQ. Top line weakened by 8% to RM82m attributable to the declines in manufacturing (-10%) and pharmaceutical (-9%), which more than offset the gain in property development (+5%). Manufacturing division was impacted by the slowdown of the semiconductor market and softened new orders. In turn, core net profit fell by 7% to RM10m mainly due to high set up cost from the new manufacturing plant.

YoY. Revenue skidded 12% where: (i) manufacturing lost 21% to RM52m driven by lower profit margin sales mix, weak market demand; (ii) property development performance rose 86% to RM10m largely arising from site progress of ongoing project at Langkawi; (iii) pharmaceutical and healthcare products division fell 8% to RM19m. As a result, bottom line plunged at a faster pace of 29% impacted by higher pre operation cost from the new manufacturing plant.

YTD. Turnover strengthened by 8% to RM172m as the gains from pharmaceutical (+7%) and property development (+138%) were more than sufficient to offset the drop in manufacturing (-2%). Core net profit fell 12% to RM21m for the same reason mentioned above.

Regional breakdown. For 1HFY23, Malaysia remains the largest top line contributor with 78% (1HFY22: 76%), followed by Singapore, US and others with 10%, 6% and 6% (1HFY22: 8%, 8% and 8%), respectively.

Outlook. Kobay anticipates manufacturing’ performance will be soft amid a weak global economy. Property development is expected to deliver positive performance on the back of the completion of its maiden Langkawi project. Pharmaceutical shall continue to work on widening its product range, along with cost control efforts to improve profitability and market competitiveness.

Forecast. Based on the deviation above, we cut manufacturing’s sales contribution and this has led to lower FY23-25 EPS by 20%, 22% and 23%, respectively.

Reiterate BUY with a lower TP of RM4.00 (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 - 10 Feb 2023