Results

• QES Berhad (QES) posted its 2Q23 results with RM67m (+26% yoy & +16.9% qoq) of revenue and RM6.9m of PATAMI (+45.5% yoy and +44.4% qoq). The better performance was contributed by both Distribution and Manufacturing divisions due to a low base, strong backlog orders in FY22, and higher machine and solution sales from the Manufacturing division.

• Profit within expectation. QES’s 2Q23 performance was within our expectation after 1H23 PATAMI accounted for 46% of our FY23 forecast.

• All business divisions showed improvement. In 2Q23, QES reported operating profits of RM7.5m from Equipment distribution (+39.2% yoy and +3.7% qoq), RM0.7m from Materials & engineering solution (+17.6% yoy and +181% qoq) and RM1.8m from the Manufacturing segment (compared to loss of RM1m in 1Q23 and profit of RM 0.3m in 2Q22). The improvement in the Manufacturing division was mainly supported by higher sales of Automated Handling System, Automatic Optical Inspection machines and Smart Manufacturing Solution (SMS).

• Asean customers cushion decline from China. During the quarter, Singapore and Philippines markets achieved impressive YoY revenue growths of +128.9% and +90.3%, respectively. This growth was driven by the fulfillment of strong FY22 orders, delivered in 2Q23 due to extended lead times. On the other hand, China's revenue declined by 8.9% YoY, in line with the challenging semiconductor industry in the country.

• Sturdy balance sheet. QES registered a cash position of RM58.63m (down from RM61.29m in 1Q23) with net gearing of 0.25x (from 0.19x in 1Q23). The healthy balance sheet has formed a solid foundation for the Group in reduce risk amid the uncertainty of global economic.

Comments  

• Diversification to mitigate risks amidst the semiconductor downturn. The Group's approach in diversifying its customer segments beyond a heavy reliance on semiconductors industry has positioned itself to mitigate risks during the semiconductor downturn and gain resilience in fluctuating markets compares to its peers.  

• Awaiting China segment to recover. QES's China market has been adversely affected by the challenging conditions in China's semiconductor industry, characterized by cooling consumer demand and inventory clearance. Despite these current challenges, we maintain optimism regarding the long term prospects of QES's China segment. This is due to the ongoing push for chip self-sufficiency in China, which is driving investments in the industry. QES stands to benefit from this trend, as it offers significant growth potential in an untapped market with ample room for expansion.  

• 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 supported by a healthy order book of RM106 million (Distribution: RM 91m, Manufacturing: RM 15m) as of 31st July (vs: RM 113 million as of 30th April) in tandem with the bottom line contributions from JV with Applied Engineering.  

Earnings Outlook  

• We are keeping our FY23 and FY24 net earnings forecasts at RM25.4m and RM28.7m respectively.  

Valuation/Recommendation  

• Maintain BUY with an unchanged target price of RM 0.725. Our valuation is based on 21x PER of FY24F EPS of 3.4 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 22% upside against of the current closing price of RM0.595.

Source: JF Apex Securities Research - 23 Aug 2023