INVESTMENT MERIT

Our POSITIVE view remains intact based on the group’s brighter prospect in 2H17 and FY18; anchored by new speedenhanced and customised testers for Automotive and Smart devices applications. Its state-of-the-art engineering capability and continuous R&D coupled with new technology advancement in Auto and Smartphone are catalysts for securing consistent orders, especially during industry upcycles. Maintain TB with a higher roll-over TP of RM3.05.

Decent 1H17 performance despite some sales delays in 2Q17. The group recently announced its 2Q17 NP of RM7.1m (+18% QoQ; -32% YoY), bringing 1H17 NP to RM13.1m (+10%) which made up 35% of our FY17E earnings. We deemed the results as within expectation as the 1H earnings typically made up 25-41% of the full-year earnings for the past three years. As expected, the group declared its first interim net DPS of 3.0 sen which implies 63% pay-out ratio. We are expecting the group to pay 9.0 sen DPS (representing 70% of DPR). For its 2Q17 results, although NP was down by 32% YoY due to slower sales (-19%) on delayed orders from customers for rescheduling of endproducts introduction and further dragged by forex losses of RM1.6m, we are not perturbed by the delays as we understand that the late delivery is only due to timing issue with orders still resilient. Moreover, 2Q16 earnings base was exceptionally high, boosted by much higher General Lighting orders.

2H17 prospect to be driven by the resilient demand of Automotive and Smart Devices. For the lion’s share revenue contributor -

Automotive segment, (contributed 60% in 1H17), demand is resilient with the addition of new speed-enhanced testers to supersede earnings if orders continue. Meanwhile, the group has already been working on the R&D of new test equipment for usage in autonomous driving that can also be applied to smart devices. Although no quantum was mentioned for this equipment and we believe that the contribution will only be seen in 1Q18 if any, we are POSITIVE on this as the group’s move into the forefront of technology could bring in lucrative earnings prospect, which was proven previously with its state-of-art engineering capability. Meanwhile for its Smart Devices segment, we believe that the orders for its new customised flash tester should be stronger in 2H17 in conjunction with the brand-new smartphone launching by one of the world’s leading smartphone vendors. Recall that for FY16, the group’s Smart Devices segment has grown 92% YoY to 37% in terms of revenue share in FY16, just with the introduction of new flashing features into the same generation smartphone.

Trading Buy with a higher TP of RM3.05 from RM1.90. Post model updates, we reduced our FY17E CNP by 4% with the assumption of slight delayed delivery for its new Automotive equipment, to 1Q18. Meanwhile, we introduce FY18E earnings of RM43.1m (+23%) with the key assumption of higher sales for its high-value speed-enhanced testers as well as better product mixes. Our TP of RM3.05 is based on 19.0x FY18E PER which is at a 10% discount (on smaller market cap) to its closest peer comparison, VITROX which is trading at 21.0x FY18E PER. Note that in terms of PEG, our ascribed PER of 19.0x which implies a 0.8x FY18E PEG (on 25% NP growth in FY18E) is also broadly in line with VITROX’s 0.9x FY18E PEG. Coupled with our forecast net DPS of 11.0 sen in FY18E (implying yield of 4.1%), our TP of RM3.05 suggests a total upside of 17% from here.

Source: Kenanga Research - 5 Sept 2017