While record-high sales were within expectations, CNP missed owing to weaker USD and high material prices, which led us to cut our FY18E CNP by 19%. That said, we remain hopeful on the group’s mid-term prospect, premised on the existing and new orders from MNC clients. We see better value proposition following the recent share price correction, with its forward PER only trading at 12.2x vis-à-vis its EMS peers’ 14.0x PER. Maintain OP with a lower TP of RM2.10.

Record-high revenue; but bottom-line impacted by broad-based dampeners. Despite record-high revenue in 4Q, the group’s CNP was not spared the adverse forex impact and high material costs. Note that the USD/MYR swing during the quarter was high, from RM4.23/USD to RM4.05/USD while raw materials (copper +7% QoQ and other components) were mostly purchased during the strong USD period. As a result, FY17 CNP only made up 74%/79% of our/consensus earnings estimates. Note that CNP has been adjusted for; (i) net addition of receivables impairment amounting to RM5.4m, (ii) net reversal of inventories written down of RM11.1m, and (iii) other immaterial items. Absence of DPS was expected in this quarter. The group typically declared dividends after 4Q results; which we believe the pay-out for FY17 will be maintained at least 40% and above.

YoY, FY17 revenue improved by 17% driven by its lion’s share manufacturing segment (+16%). While the strong quantum of growth can be partly attributed to the low base in FY16, one should take note that the absolute sales were at record high, thanks to the continuing orders loading (for both EMS activities & raw wire and cable products) from existing customers. While adjusted EBIT grew 19% on slight margin uptick of 1.3ppts from continuous yielding improvement, CNP grew only by 10% on higher effective tax rate of 24.3% (vs 21.1% in FY16). QoQ,

despite the higher loadings in 4Q17 which saw its revenue improving by 16% alongside the core EBIT improvement of 12%, while core NP dropped by 38% on much higher taxation of RM7.4m (vs. last quarter’s RM0.7m).

Resilient sales in FY18; however forex and raw material costs are not in favour. From our last meeting, management noted that the orders visibility and hit rates are better; with decent orders loadings (for both EMS activities + raw wire and cable products) grabbed from other global competitors. Meanwhile, two out of the four new projects, being the manufacturing of industrial electronics parts (OEM) and ODM project with a renowned MNC should continue to see traction. On the other hand for costing, nearly 85% revenue of the group is denoted in USD, with natural forex hedging from raw materials purchases (mainly in USD) which constitute about c.60% of total costs. Based on our sensitivity analysis, every 1% fluctuations in the USD and raw materials from our new base case assumption of RM3.90/USD (from previously RM4.10/USD) will impact our Fwd. NPs by c.2%. All in, as we believe the group faces difficulty in passing the overall cost hike to customers, we see cost pressure continuing to suppress profitability, leading us to cut our FY18E CNP by 19% despite minor changes on the sales drivers. We expect recovery in FY19E CNP (+18%) with the assumptions of new contracts being secured on similar margins assumption.

Maintain OUTPERFORM with a lower TP of RM2.10 (15.0x FY18E PER), from RM2.65. We see better value proposition following the overdone share price correction, with its Forward PER only trading at 12.2x, a 14% discount to its closest EMS peers which is trading at 14.0x PER. Moreover, the group also offers relatively higher NP margin, more advanced manufacturing capabilities as well as having strong parentage support from Foxconn Technology Group. Maintain OUTPERFORM.

Source: Kenanga Research - 26 Feb 2018