Investment Highlights

• We initiate coverage on QES Group Berhad (QES) with a BUY call and a target price of RM0.66. QES is a one-stop specialist in manufacturing, distribution and services of test, inspection and measuring equipment with over 30 years of experience. With the core business in manufacturing and distribution of inspection, test, measuring, analytical and automated handling equipment, QES serves a diversified market segments notable semiconductor, electrical and electronics as well as automotive industries.

• Benefiting from robust chip demand worldwide driven by promising outlook of technology. QES is riding on the rising demand and rapid growth of the semiconductor industry. According to WSTS, 1Q22 global semiconductor sales increased 23% yoy and IC Insights has forecasted total semiconductor sales to grow at a CAGR of 7.1% from 2021 to 2026.

• Growth in Manufacturing Division as catalyst. With the management’s focus on R&D and strong CAPEX, the contribution from the manufacturing division is expected to grow further in long run. We are forecasting a 40% yoy growth in revenue and profit of manufacturing segment in FY2022F and 13% revenue growth yoy with 17% profit growth yoy in FY2023F respectively.

• Vertical expansion through JV with a global semiconductor giant. QES is teaming up with Applied Engineering Inc (AE) from the US with 30% equity interest in the JV named Applied Engineering Technology (M) Sdn Bhd (AETM). QES will be able to leverage on the well-established technical strength of AE with the transfer of technology from AE to further improve the Group’s manufacturing capabilities.

• Sustainable income source to support stable growth. QES has a consistent recurring income based of approximately RM40m a year which accounts for 20%- 25% of total Group’s revenue by providing maintenance and services of spare parts to their clients.

• Diversified customer segments. The Group diversified customer segments spanning across semiconductor, Electrical and Electronics (E&E), metal as well as automotive industries thus reducing the reliance on any single customer or end-user market.

• Undervalued Semiconductor Company compared to peer. QES is considered undervalued comparing with the industry peers as the Group is trading at 18x forward PER while the industry peers are trading at 25x – 40x forward 12M PER.

• Aggressive expansion…… QES in on track in its massive capacity expansion. QES’s Shah Alam plant expansion has increased production capacity by 40% and the second plant in Penang is estimated to double the existing capacity.

• ……backed by sturdy balance sheet. The healthy balance sheet forms a solid foundation to the Group’s expansion plans mentioned above. QES’s net gearing ratio currently stands at 0.20x.

• Efforts of management on the ESG issues to mitigate risks. The management of QES is proactive on the ESG agenda and has taken initiative actions and plans to mitigate ESG risks to the Group.

• Eyeing expansion in China market. The Group is eyeing to expand the business in China and aims to yield positive results in 2HFY22 once the lockdowns are lifted.

• Migrating to Main board. The migrating to Main board are expected to be complete on October CY22 and it will be attract more interest of Institutional investor to the share of the Group.

Valuation/Recommendation

• We derive a target price of RM0.66 for QES Berhad. Our valuation is based on 20.8x of FY23F EPS of 3.2 sen, which is 30% discount to the industry average forward PE on 29.7x as taking considering the smaller scale and lower profit margin of the Group. We advise investors to accumulate the stock on current share price weakness as our fair value of the stock renders 23% upside against of the current closing price of RM0.535.

Earnings Outlook

• We project a 17% and 9% of yoy revenue growth for FY22F and FY24F to RM259.9m and RM283.9m respectively with a strong order book as well as expectation of capacity increase after the complete of factory expansion in Glenmarie. Meanwhile, our net earnings forecasts for FY22F and FY24F are stood at respective RM 22.8m (+20% yoy) and RM 26.4m (+15% yoy) on the back of anticipating better performance from manufacturing division which yields better margin as well as positive earnings contribution from the associate – AETM which has begun operation in April 2022.

Key Risks

• Fluctuations in foreign exchanges rates.
• Operations largely rely on suppliers.

• Breakout of Covid cases and Zero-Covid strategy by China Government may slow down QES’ expansion into China’s market.

• Supply Chain disruption affected manufacturing division

Source: JF Apex Securities Research - 25 Aug 2022