Results

• QES Berhad (QES) posted a remarkable 3Q22 with RM72m (+39.3% yoy & +35.5% qoq) of revenue and RM9.5m of PATAMI (+153% yoy & +101.3% qoq). The stellar performance was contributed by higher sales and profit from both distribution and manufacturing divisions.

• Revenue in line but profit exceed expectation. QES’s 3Q22 and 9M22 revenue are in line with our expectation after accounting for 75% of our full year forecast. Surprisingly, 3Q22 net profit outperformed our forecast (after achieving 99.6% of our full year profit forecast) due to strong performance from its manufacturing segment which posted a higher margin mix.

• Business segments posted strong growth. In 3Q22, QES reported RM 10.3m profit in Equipment distribution (+90.8% qoq), RM 9.6m profit in materials & engineering solution (+40.7% qoq) and RM 4m profit in manufacturing segment (+1049% qoq).

• Geographical segments. The Group’s revenue from Malaysia and Singapore has surged by +46.5%yoy/+75.6% qoq and +94.4% yoy/+192.4% qoq respectively. However, its operations in China reported RM 0.8m sales in the quarter which dropped 73% qoq.

• Profit margin growth driven by higher contribution from manufacturing segment. QES’s PBT margin stands at 18% in 3Q22 after growing +8ppts yoy from 10% in 3Q21 and +6.4ppts qoq in 2Q22. The performance was mainly due to higher sales contribution from the manufacturing division which contributed higher margin in the quarter and accounted for 16% of total revenue in 3Q22 (vs 2Q22: 12% and 3Q21: 10%). The stellar performance in the manufacturing segment was driven by higher sales of handling and measurement equipment to semiconductor customers but partially offset by lower sales of inspection equipment in the quarter.

Comments

• Diversified customer segments help defy industry downturn. Industries such as memory chips and consumer electronics are experiencing a downturn, but QES’ order book flow remains strong in various segments such as automotive, industrial applications etc. The diversified of clientele provides QES a strong base of steady earnings that posted growth and profitability amid industry slowdown. As at 3Q22, QES’ orderbook stands at RM115m (RM82m distribution and RM33m manufacturing).

• Sturdy balance sheet minimizes risk amid economic uncertainties. QES registered a net cash position which stood at RM26.3m with net gearing ratio of 0.29x as of 3Q22. The healthy balance sheet has formed a solid foundation for the Group to reduce risk amid uncertainty in global economy.

• Should see positive earnings contribution from JV in next FY. The JV to team up with Applied Engineering has commenced operations in April 2022 and we expect to see positive contributions to QES's bottom line in 2H23 onwards.

• Main Market migration delayed but still on track. The migration to Bursa Malaysia’s Main Market was expected to be completed in October 22, but due to some delays, the process is expected to be completed by this FY. We understand from the management the migration process so far is not facing many setbacks or obstructions. Upon completion, it will put QES in the radar of institutional investors. Current QES’s institutional shareholdings is about 3-4% to date.

• China easing corona rules favours QES’s China expansion. As China has eased quarantine times for inbound travellers, along with several other of its hard-line containment rules, it’s easier for local engineers and staff to access China’s operation and customers. As China’s government is focussed to provide impetus in building their domestic semiconductor ecosystem, we are optimistic on China has offering QES a huge growing space with large untapped market.

Earnings Outlook

• We raise our FY22F net earnings forecasts to RM 28.9m (from RM22.8m previously) as we increase our manufacturing segment sales contribution forecast but slightly lower the distribution sales forecast. In the meantime, we increased our manufacturing segment’s PBT margin estimations by 8 ppts to 22% after 3Q22 performance exceed our forecast. However, we are keeping our FY23 net earnings at RM26.4m.

Valuation/Recommendation

• Maintained BUY with unchanged target price of RM 0.66. Our valuation is based on 20.8x of FY23F EPS of 3.2 sen, which is a 30% discount to the industry’s average forward PE of 29.7x taking considering the smaller scale and lower profit margin of the Group. Our fair value of the stock renders 17% upside against of the current closing price of RM0.560.

Source: JF Apex Securities Research - 23 Nov 2022