While 9M16 CNP came in below expectations, we remain hopeful of the group’s mid-term prospect. Our optimism for FY2017 stems from new pipeline projects from existing and new customers, which will be sufficient to offset the sales shortfall in FY2016, even with very conservative assumption. Post earnings revision (FY16E/FY17E CNP: -39%/-3%), our TP is lowered to RM2.40 (from RM2.49). Any price weakness from panic selling represents a buying opportunity. Maintain OUTPERFORM.

9M16 results came in below. 3Q16 CNP at RM3.6m (-59% QoQ; -78% YoY), 9M16 CNP of RM14.0m (-64%) missed expectations, making up just 38% of our full-year estimate (vs. past 3-year trend of 66%-77% for the full year). Note that 9M16 CNP has been adjusted for: (i) net allowance of impairment on receivables (RM0.448m), and (ii) inventory write-downs (-RM1.6m). The negative deviations were due to (i) lower sales orders from its oversea customers, (ii) gestation period from new product ramping and (iii) lower yielding due to labour shortage. Meanwhile, absence of DPS was expected.

YoY, revenue decreased by 4%, dragged down by lion’s share manufacturing segment (-4%). Based on our understanding from management on this segment, the weaker sales were caused by the absence of box build business from STB and lower orders from Barcode scanner customers. However, Telco customers helped to cushion the impact partly with new and existing orders grabbed from other competitors. At the operating level however, due to the high overhead costs as well as unfavourable product mix, EBIT dipped by 62%.

QoQ, the weaker 3Q16 revenue (-4%) were mainly due to the lower orders from its Bar-code scanner customer as well as gestation period from new product ramping. With lower yielding, the group’s CNP dropped by 25%.

Light at the end of the tunnel will be seen in FY2017. While FY2016 appears to be a muted year for the group as mentioned above, the group’s efforts in nurturing growth with existing major and cultivating new customers came just in time to offset the earnings shortfalls that might potentially spill over into FY2017. We understand that these positive developments, which are the new projects, will be awarded by existing and new customers. Even with our conservative new sales assumption, which is half of the value from the potential projects (that will commence in FY2017 on a gradual basis), it is already offsetting the sales contribution from existing STB customers. We understand that no major capex will be incurred as the existing facilities are sufficient to take up the orders.

Skillful enough to sail through the choppy sea. Despite the weaker macroeconomic condition that does not favour the group’s prospect in the short-term as reflected in its 9M16 results and likely to spill into 4Q16, the group continues to showcase strength by winning more orders from key customers that will see low hanging fruits in FY2017. We see these as votes of confidence from its customers, showcasing the group’s excellent manufacturing capabilities.

Maintain OUTPERFORM with a lower TP of RM2.40 from RM2.49 (based on a targeted PER of 15.0x). Post-results, we reduced our FY16E/FY17E NP by 39%/3% to account for the lower sales from its Barcode scanner customers as well as operational deleveraging. The group’s superior margins, advanced manufacturing capabilities as well as strong parentage support from Foxconn Technology Group remained as key investment merits. Risk to our call; (i) slower-than-expected sales, (ii) loss of orders from its key customers, and (iii) adverse currency translations.

Source: Kenanga Research - 8 Nov 2016