Post-meeting, our POSITIVE conviction is reaffirmed stemming from the group’s improving orders visibility as well as the better earnings prospect which will be driven by its existing orders and new projects (new OEM and ODM business models); which will anchor a 2-year NP CAGR of 38%. Despite the industry-wide components shortages, we are not overly perturbed as the late delivery is only due to timing issue with orders volume still resilient. Maintain OP with an unchanged TP of RM2.87.

Extended sales momentum after its record 1Q. Glancing back on its 2Q17 results, the group extended its strong sales momentum with the registration of record high second quarter revenue (after record high first revenue) thanks to the continuing orders loading (for both EMS activities as well as raw wire and cable products) from its existing customers. Note that this was against the backdrop of industry-wide components shortages, which have caused some delays in the group’s orders delivery to customers. At the bottom-line, despite weaker USD at MYR4.33/USD (-3% QoQ), core NP increased by 25% on continuous yielding improvement on lower wastage as well as lower ETR of 21% (vs 28% in 1Q). While the passive components shortages still plague the industry at this juncture, which may continue to cause late orders delivery to customers over the near term, we are not overly perturbed with the issue as the delayed orders will be fulfilled once the shortages issue is resolved.

Brighter prospect with a higher hit rate as well as continuous orders loading. Management noted that the orders visibility is getting clearer with better orders loadings (for both EMS activities as well as raw wire and cable products) grabbed from other global competitors. On top of that, the previously-mentioned two out of the four new projects will see contribution to the 2H17 numbers. Recall that these four projects which are for the manufacturing of industrial electronics parts, are 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 model, we see possibility of the group securing other voluminous orders given the group’s high hit rate and advanced manufacturing capabilities;

considering its historical track record of always upping its ante after current orders are fulfilled. For now, we are more inclined to stick to the conservative side with our previous assumptions unchanged.

Maintain OUTPERFORM with an unchanged TP of RM2.87 (based on a targeted PER of 15.0x). We made no changes to our FY17E/FY18E NPs as our key assumptions are still intact. The group’s superior margins, advanced manufacturing capabilities as well as strong parentage support from Foxconn Technology Group remain as key investment merits. Risks to our call; (i) slower-than-expected sales, (ii) loss of orders from its key customers, (iii) components shortages, (iv) labour issues, and (v) adverse currency translations.

Source: Kenanga Research - 24 Aug 2017