Results

• QES Berhad (QES) posted its 1Q23 results with  RM57.3m (-13.7% yoy & -21.5 qoq) of revenue and RM  4.8m of PATAMI (-29.1% yoy and -12.8% qoq). The  lacklustre performance was attributed to decline in both  distribution and manufacturing divisions due to the downturn  in the semiconductor cycle.

• Profit below expectation. QES’s 1Q23 performance has missed our expectation as PATAMI only accounted for 18% of  our FY23 forecast. This is primarily due to the delay in delivery  of equipment in the manufacturing segment and the largerthan-anticipated impact of the semiconductor downturn on the  company.

• Decline in all Business segments. In 1Q23, QES’s  Equipment distribution division reported RM7.3m of profit (- 11.3% yoy but +201.4% qoq), RM0.2m profit was posted by  Materials & engineering solution (-73.3% yoy and -82.5% qoq)  and loss of RM1m by the Manufacturing segment (compared  to profit of RM 2m in 4Q22 and RM 0.7m in 1Q22).

• Geographical segments. Philippines, Thailand and  Indonesia are the only markets that registered a yoy growth  with +64.3% yoy and +26.8% qoq, +25.1% yoy and +8.7%  qoq and +50.3% yoy but -35% qoq respectively. Sales from  Malaysia dropped 11.2% yoy and 15.4% qoq while revenue  from China declined 98.3% yoy and 71.9% qoq.

• Manufacturing division incurred losses. Manufacturing  division posted revenue of RM5.8m and incurred a loss of  RM1m in 1Q23. This was mainly dragged by the delayed  delivery of an advanced metrology system (AMS) equipment  worth RM5m. We expect the equipment will be delivered and  revenue recognized by 2Q23.

Comments

• Diversification to mitigate risks amidst semiconductor  downturn. The Group's approach in diversifying its customer  segments beyond a heavy reliance on semiconductors industryhas positioned it to mitigate risks during the semiconductor  downturn and gained resilience in fluctuating markets compared to its peers.

• Sturdy balance sheet minimizes risk amid economic  uncertainties. QES registered a net cash position of  RM61.3m with net gearing of 0.19x as of 1Q23. The healthy  balance sheet has formed a solid foundation for the Group in  reduce risk amid the uncertainty of global economic.

• Cautiously optimistic on 2H23. The Group is currently in a challenging time due to the slowdown in semiconductor  outlook. However, we anticipate a better performance in  second half of FY23 compared to the first half. This expectation  is bolstered by the order book on hand of RM113 million as of  April 30th 2023, coupled with the anticipated earnings  contribution from the JV with Applied Engineering.

Earnings Outlook

• We have revised downwards our FY23 net earnings to  RM25.4m (from RM26.3m previously) after slashing our sales  forecast from manufacturing division on the backdrop of  challenging outlook in the industry. Nevertheless, we  maintained our FY24F net earnings at RM 29m.

Valuation/Recommendation 

• Maintained BUY with unchanged target price of RM  0.73. Our valuation is based on 21x PER of FY24F EPS of 3.5 sen, which is 30% discount to the industry average forward PE on 30x as taking considering the smaller scale and lower profit  margin of the Group. Our fair value of the stock renders 37%  upside against of the current closing price of RM0.535.   

Source: JF Apex Securities Research - 22 May 2023