Kobay guided that the incubations for the 2 new projects that dragged the manufacturing division are likely to dissipate soon as the factories are fit for productions. For the solar segment, the prior delay from authorities’ approvals has been rectified and the factory is now successfully connected to the electric power after the substation upgrade by TNB. Despite the minimal contribution from EMS, Kobay’s main aim is to utilize the readily available SMT and achieve breakeven. As for ADS, management foresees that demand will kick in stronger once bitcoin price recovers to the level of USD26k-27k. Property development and pharmaceutical are expected to continue delivering positive performances. Reaffirm our BUY call with unchanged TP of RM4.00.

Recap. Kobay’s recent results missed our estimate with 2QFY23 core net profit of RM10m (-7% QoQ, -29% YoY) which brought 1HFY23’s sum to RM21m (-12% YoY). This underperformance was mainly due to under delivery by the manufacturing division, which also impacted by 2 new projects that were in incubation stage.

Incubation stage is likely to be resolved soon. Note that manufacturing division weakened by -10% QoQ/ -21% YoY on the back of the slowdown of the semiconductor market and softened new orders. Additionally, this was also impacted by the 2 new projects that are in incubation stages, namely EMS and solar frame that incurred pre-operating cost of approximately RM6m for the past two quarters. Despite the relatively healthy outlooks for aerospace and O&G divisions, Kobay anticipates manufacturing’ performance will be softer amid a weak global economy.

Solar segment. The group is ready for its venture into the manufacturing of aluminium frames for solar panels for renewable energy-related business. Kobay has already completed the renovation and installation of the new 15 -acre plant dedicated for renewable energy-related business. The prior delay from authorities’ approvals has been rectified and the factory is now successfully connected to the electric power after the substation upgrade by TNB. The anodizing line has been set up and currently the factory is ready to run for production.

EMS. Recall that Kobay invested RM20m in Innospec, a new SMT services subsidiary, to provide end-to-end complete solution for ADS. Kobay has already been qualified by customers in 2QFY23 and is currently awaiting orders to be released to kick start production. At this juncture, the group just secured 2 customers with revenue guidance of about RM1m monthly. Despite the minimal contribution Kobay’s main aim is to utilize the readily available SMT line and achieve breakeven. From the group observation, the E&E and semi segments still indicate slowdown. To mitigate this, Kobay’s strategy is to look for several customers and secure more projects.

Advance data server. We understand that demand has weakened on the back of the decline in digital currency prices. Management foresees that demand will kick in stronger once bitcoin price recovers to the level of USD26k -27k. From management guidance, order visibility for the next 3 months is still murky due to the muted demand.

Property and pharmaceutical. 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. The division is looking to expand its business in nutrition/supplement that could garner higher margin.

Forecast. Unchanged.

Reiterate BUY with TP of RM4.00 (see Figure #1). 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 - 15 Mar 2023