FY17 NP came in within expectations. Absence of dividend was also as expected. Post model updates, our FY18E earnings have been marginally tweaked by -2% for house- keeping purposes; with FY19E earnings also being introduced (+13%) underpinned by the existing contracts. We believe most of the near-term catalysts have been priced in at this level. Hence, we maintain MP with a lower TP of RM1.40 (based on 13.5x FY18E PER)

In line with expectations. The group reported 4Q17 net profit (NP) of RM33.1m (+9% QoQ; +57% YoY), bringing FY17 NP to RM104.5m (+28% YoY) which made up 99%/95% of both our and the consensus? full-year estimates. As expected, no dividend was declared for the quarter under review. Note that the group usually pays its final dividend by end of July/early August; with dividend payout of not less than 50% as per its dividend policy. The group is projected to pay a NDPS of 4.4 sen for FY17.

YoY, FY17 revenue recorded an impressive growth of 91% driven by the contribution from second tranche of household electrical appliances (floor cleaning) contracts and the new revolutionary products (beauty tools). However, EBIT recorded a smaller growth quantum of 35% as margin (-3.0ppts to 7.1%) was corroded by the short-term cost pressures resulting from the hiring of higher cost contract workers to meet high orders (due to policy changes of foreign workers hiring) in 6M17 coupled with lower profitability from the new revolutionary products. Note that the foreign labour issues have been resolved.

QoQ, while 4Q17 revenue marginally inched up 1%, EBIT improved by a higher magnitude of 10% with margin improved marginally by 0.6ppts alongside the resolution of foreign labour issues. However, note that the group?s NP margin is still hovering at the 5-6% mark instead of the previously 7% mark due to the unfavourable product mixes as well as higher component costs.

Striking a balance. While the group?s profitability continues to be suppressed by higher components costs as well as greater products? complexity in the short term, the shortfall is being compensated in terms of absolute volume, which should meet forward expectations barring unforeseen circumstances. Beyond that, we do not discount the possibility of more contracts being awarded for revolutionary products in the long-term (which are in line with its UK customer?s vision), given its solid reputation in the industry with world-class manufacturing capability. Note that the group still has ample free capacity (of 75%) to take in more contracts. All in, with sales contributions from existing and new products, potentially amounting to RM1.7b-RM2.0b/year in FY18- FY19 (from UK customers alone), this should anchor a 2-year NP CAGR of 19%, even after registering 29%-93% growth in FY16-FY17.

Maintain MARKET PERFORM with a lower TP of RM1.40. Post model updates, our FY18E earnings have been tweaked by -2% for house-keeping purposes. We have also introduced our FY19E earnings, which implied 13% growth underpinned by the existing contracts. All in, by assigning an unchanged PER of 13.5x on FY18E EPS, our TP is reduced from RM1.45 to RM1.40. We maintain a MARKET PERFORM on the stock as we view that the near-term positives have already been priced in. Risks to our call include: (i) higher than expected orders from its customers, (ii) lower input costs, and (iii) new orders secured from new customers.

Source: Kenanga Research - 30 May 2017