While the group continues to register record-sales in 3Q, the headline NP was affected by impairment losses on receivables due to technical glitches on new system adoption by client. Excluding the one-off item, core NP and the absence of DPS were well within expectations. We remain hopeful on the group’s mid-term prospect which will be underpinned by the existing and new orders from MNC clients. No changes made to our FY17E/FY18E for now. Maintain OP with an unchanged TP of RM2.87.

3Q17 masked by technical glitches. The group 3Q headline NP appears to be exceptionally weak, recorded at a mere RM1.9m (-83% QoQ and 59% YoY). This was, in fact, affected by the net impairment losses from its trade receivables, caused by its client’s technical glitches on new system adoption alongside stringent impairment policy. By adjusting for the (i) net allowance of impairment of receivables (RM11.2m, which are very likely to be reversed in the next coming quarter), (ii) net reversal of inventories (RM0.2m) as well as other immaterial items amounting to <RM1m), 3Q core NP would have been RM13.3m (17% QoQ; 271% YoY), sending 9M17 CNP to RM33.6m (+142%) which made up 51% and 55% of our and consensus’ FY17E
earnings. We deemed the results to be within expectations as 4QFY typically is the strongest quarter due to customers’ year-end robust orders. Recall that 4QFY for the past two years made up 34%-59% of the full-year numbers. Meanwhile, absence of DPS was also expected for this quarter.

YoY, 9M17 revenue improved by 29%, which was driven by its lion’s share manufacturing segment (+28%). While the strong quantum of growth can be partly attributed to the low base in 9M16, one should take note that 9M17 was at record high 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. Meanwhile, it is also noteworthy that the sales momentum remains tall with 3Q17 revenue marked as the third consecutive record-high sales. At the bottom-line, despite higher ETR of 25.1% (+1.9ppts), CNP soared by +142% on better operating leveraging as well as continuous yielding improvement on lower wastage. QoQ, while 3Q17 revenue dropped by 10% on slower sales due to the prevailing component shortages issue, adjusted EBIT, in fact, dropped by a narrower quantum of 2% on lower operating expenses as well as higher forex gains.

Extended its sales momentum into 3Q17. Revenue had continued to show strong momentum with record 3Q17 sales being recorded after the record 1H17 sales; which we showcased the group’s strength as an integrated EMS player which had continued to gain orders tractions from its MNC customers. This is even against the backdrop of the industrywide component shortages issue which has been a hurdle for the group currently. We are still keeping our high hopes on 4Q17 as well as its midterm prospects, which will be anchored by its OEM and ODM projects with a renowned MNC.

Maintain OUTPERFORM with an unchanged TP of RM2.87 (15.0x FY18E PER). 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 remain as key investment merits.

Source: Kenanga Research - 7 Nov 2017