Despite weaker-than-expected 3Q17 results which were dragged by slower-than-expected new sales and higher setup costs, the 3rd interim net DPS of 0.75 sen was as anticipated. Mass production of new engineered products is on the way with fruition to be seen only from 1Q18 onwards. Post results, we reduced our FY17E/FY18E earnings by -32%/-4% to account for the delayed incremental sales and higher opex for the new facilities setup. Maintain OP with a lower TP of RM1.55.

Missed expectations. The group recorded 3Q17 core net profit (NP) of RM2.8m (-37% QoQ, +144% YoY), bringing the 9M17 core NP to RM12.6m (+171%) which made up 50%/52% of our/consensus’ fullyear estimates. While we previously assumed much faster contribution from the new engineered products, which had instead saw some delays on the stringent qualification from its new customers, the higher-thanexpected operating expenses inclusive of setting up costs (c.RM2m) was the main culprit for the weaker quarter. That said, we view the investment as crucial for the group in venturing into new businesses, which will supercharge its earnings prospect in FY18. As expected, a third interim net DPS of 0.75 sen was declared under the quarter reviewed, bringing the YTD net DPS of 3.0 sen. We are expecting the group to declare a total net DPS of 3.8 sen for the year.

YoY, 9M17 revenue grew strongly by 20% underpinned by the growth from all segments with marginal support from stronger USD. Topping the list, the Auto segment jumped 25% on higher production ramp-up from plungers (for Automotive ABS application) followed by strong growth from Engineered products (+23%). More positively, at the operation level, EBIT soared 131% driven by: (i) better product mixes, (ii) better utilisation of CNC machining as well as (iii) the absence of settlement for adverse currency hedging alongside the low base in 9M16. QoQ, 3Q17 sales marginally dropped by 1% on weaker seasonality, particularly from the Auto segment (-5%, on shorter working quarter due to the summer holiday for its European customer). However, with the higher cost of sales as well as the elevated operating expenses (+28%) mainly for the relocation, upgrading and maintenance of CNC machines coupled with the new plant refurbishment (totalling to c.RM2m), EBIT dropped by 81%. Going forward, we understand that the operating expenses should normalise which will also be accompanied by the operational leveraging from better sales from 1QFY18 onwards.

Hold on tight for the blossoming of earnings in FY18. The stack-up additional orders of Automotive EBS components from its new customer are still intact. All in, for Automotive segment, the total volume growth could at least see a 2-year CAGR of 30% with another 50 CNC machines to be invested next year. For the HDD segment, management is seeing its orders from third party machining as well as adoption of helium drive (for nearline enterprise) to supersede industry growth. On the new segment - engineered products - the low-margin portfolio, which is dominated by Camera segment, will be rejigged towards the new fatter margins products (in consumer segment) with mass production to be seen from 1Q18 (3QCY17) on a gradual basis.

Maintain OUTPERFORM with a lower FD TP of RM1.55 (from RM1.66). Post model update, our FY17E/FY18E earnings have been reduced by -32%/-4% to account for the delayed incremental sales from engineered products and higher opex for the new facilities set-up. Hence, with an unchanged forward PER of 15.5x being ascribed (represents the group’s up-cycle valuation of +1SD), our new TP is reduced to RM1.55. Maintain OUTPERFORM.

Source: Kenanga Research - 18 Aug 2017