Within expectations. Another decent 2Q17 CNP of RM11.3m was reported (+25% QoQ; +31% YoY), bringing 1H17 CNP of RM20.3m (+95%) which made up 31%/33% of our/the consensus’ full-year estimate. We deem the results to be within expectation as 1H typically only made up 22-40% of the past two years’ CNPs. Note that 1H17 CNP has been adjusted for: (i) net allowance of impairment on receivables (+RM2.2m), and (ii) net reversal of inventories (-RM3.8m) as well as other immaterial items amounting to <RM1m. Meanwhile, absence of DPS was also expected for this quarter.
YoY, revenue improved by 32% driven by its lion’s share manufacturing segment (+33%). While the strong quantum of growth can be partly attributed to the low base in 1H16, one should take note that revenue and CNP in 2Q17 were record highs that the group ever achieved thanks to the continuing orders loading (for both EMS activities as well as raw wire and cable products) from existing customers. At the bottom-line, despite higher ETR (+2.6ppts), CNP soared by +95% on better operating leveraging as well as continuous yielding improvement on lower wastage. QoQ, 2Q17 revenue improved by 9% on normalisation from the weak seasonality in 1Q17. With better operational leveraging, coupled with lower ETR, CNP increased by 25%.
Extended its sales momentum from 1Q17 to 2Q17. FY16 appears to be a muted one for the group given a series of unfortunate events. However, the group managed to turn things around swiftly with a record- high 4Q16 CNP which made up for the shortfall in 9M16. Since then, revenue had continued to show strong momentum with record 217 sales being recorded after the record 1Q17 sales. We believe this was due to the group’s strength as an integrated EMS player which continued to gain orders tractions from its MNC customers. For the new projects, recall that two out of the four new projects were finally in the bag and these four projects which are for the manufacturing of industrial electronics parts, were to be awarded by its existing customers; with one being an ODM project with a renowned MNC. While the two projects win (with one OEM and one ODM business model) are very much anticipated which we have already accounted earlier in our earnings model considering the group’s high hit rate and advanced manufacturing capabilities, we see the ODM project as a door-opening opportunity for the group to tap into voluminous orders going forward. For now, we are more inclined to stick on the conservative side with our previous assumption remain unchanged. We understand that no major capex will be incurred as the existing facilities are sufficient to take up the orders.
Maintain OUTPERFORM with an unchanged TP of RM2.87. As our earnings drivers are still intact, we made no changes to our FY17E/FY18E earnings. The group’s superior margins, advanced manufacturing capabilities as well as strong parentage support from Foxconn Technology Group remained as key investment merits.
Risks to our call include: (i) slower-than-expected sales, (ii) loss of orders from its key customers, and (iii) adverse currency translations.
Source: Kenanga Research - 08 Aug 2017
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