Period

3Q16/9M16

Actual vs. Expectations

Within expectations. The group reported 3Q16 net profit (NP) of RM24.1m (+31% QoQ; +129% YoY), bringing 9M16 NP to RM60.5m (+97%) which made up 67% of both our and the consensus’ FY16 NP estimates, respectively.

We deem the results to be within expectations as we expect another strong quarter in 4Q16 to make up for our FY16E NP.

Dividends

As expected, no dividend was declared under the quarter reviewed. Key Result

Highlights

YoY, 9M16 revenue spearheaded to RM819.1m (+94%) thanks to the consolidation of its subsidiary Tecnic since 1Q16. Stripping out the contribution of Tecnic, 9M16 revenue still grew strongly by 59%, mainly driven by the contribution of the first tranche of cordless vacuum cleaner contracts secured in May 2015 (equiv. to RM400m), on top of growth in other products. Meanwhile, EBIT came in at a higher growth quantum of 102%, with margins inching up to 9.9% (+0.4ppts) as a result of higher operational efficiency.

QoQ, 2Q16 revenue increased by 21% mainly boosted by the contribution of the first tranche of cordless vacuum cleaner contracts. With better yield reaped from higher utilisation rates, NP margin expanded to 7.7% (+0.6ppts), sending quarterly NP to RM24.1m (+31%).

Outlook

While we gather from the management that there are slight delays to the commencement for the second tranche of cordless vacuum cleaner contracts (contracts value: RM600m) from initial commencement in Jan-16 being pushed to Mar-16 due to the longer than expected product improvisation, we are comfortable with the delays as this is only a timing difference for sales recognition.

We believe the group’s long-term earnings prospects will remain resilient anchored by the two long-term contracts awarded by Dyson (sales contribution of RM1b/year on cordless vacuum cleaners) which will eventually support the robust 2-year NP CAGR of 93%. Beyond that, we do not discount the possibility of more contracts being awarded for revolutionary products (which are in line with Dyson’s vision) given its solid reputation in the industry with world-class manufacturing capability. Note that there is ample free capacity (of 70%) to take in more contracts.

Change to Forecasts

Post results, we lower our FY16E NP by 7% to account for the slight delay of commencement for the second tranche of cordless vacuum cleaner contracts. Meanwhile, we made no changes to our FY17E NP.

Rating

Maintain OUTPERFORM

Valuation

We maintain our TP of RM1.76. This is based on a targeted 14.0x FY17E PER, a valuation which is 20% higher from its EMS industry peers. The premium valuation is justified, backed by its robust 2-year NP CAGR of 93% as well as the higher-than-industry (yet sustainable) margins backed by its cost pass-through mechanism.

Risks to Our Call

Loss of orders from its customers

Weaker than expected consumer sentiment

Source: Kenanga Research - 22 Feb 2016