1Q18 NP came in line and so was the absence of dividend. We made no changes to our FY18E/FY19E earnings. Several strategic measures have been initiated to strengthen the group’s manufacturing capabilities to drive revenue growth momentum further with better profitability in the medium term. While we have yet to account for the positives, the riskreward ratio is appealing at this level, even with our conservative forecasts. Maintain OP with an unchanged TP of RM1.60.

Within expectations. The group reported a decent 1Q18 net profit (NP) of RM33.4m (+1% QoQ; +83% YoY) which made up 25%/24% 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 pay-out of no less than 50% as per its dividend policy. We are expecting the group to pay DPS of 5.4 sen for FY18 based on a payout ratio of 51%. For FY17 dividends, recall that the group has on 21st July 2017 announced a final single-tier DPS of 4.15 sen.

YoY, 1Q18 revenue soared by 64% driven by: (i) second tranche of household electrical appliances (floor cleaning) contracts, and (ii) full contribution from the new revolutionary products (beauty tools). With the subsiding cost pressures (on the absence of last minute hiring of higher cost contract workers in 1Q17 to meet high orders) coupled with the continuous yield improvement on lower wastage, EBIT margin improved by 0.7ppts to 8.3%. With stable ETR, NP improved by 83% (with NPM of 6.4%). QoQ, while 1Q18 revenue decreased by 11% on shorter working months as well as the normalization from the high base in 4Q17 (which was boosted by the exceptionally high orders from key customer), EBIT dropped by a much lower magnitude of 1% with margin improving by 0.8ppts alongside better operational efficiency. With lower ETR of 24% (-1.6ppts), NP improved by 1%.

Orders remain resilient; with potential margin enhancement coming from vertical integration. The orders for its main revenue drivers- the Beauty products and Household products which will contribute at least RM1.7b-RM2.0b in FY18E-FY19E, are still intact. While top line growth remains decent with a 2-year revenue CAGR of 16%, the key potential catalyst in the medium term to us, is on its potentially better profitability (beyond the current level) which could be reaped from its new PCBA services. Note that currently, the group is sourcing the PCB parts from other EMS players. To further improve its profitability as well as its capability as a complete integrated ‘one-stop’ EMS service provider, the group has on April 2017 announced its long-term strategic plans to expand into PCBA and other EMS related services. In our last visit in July, we were delighted to gather that the PBCA set-up will be up and running in 4QCY17, which will utilise 25% of space in its new plant. While we have yet to account for the margins accretion from the PCBA services given the scarcity of details, we see potential of margins improvement from our current conservative CNP margin assumption of 5.6%-5.7%, judging from the trend of other EMS players with in-house PCBA capability. On top of that, it is also noteworthy that with more complete integrated one-stop EMS services, this will enhance the group’s position in winning more contracts from its major customers.

Maintain OUTPERFORM with an unchanged TP of RM1.60. We made no changes to our FY18E/FY19E earnings for now as our assumptions are still intact. Hence, we maintain our TP of RM1.60, which is based on an unchanged 13.5x FY19E PER (the average 3-year forward PER). Maintain OUTPERFORM.

Source: Kenanga Research - 28 Aug 2017