Our POSITIVE view is unchanged post-meeting with management; premised on better earnings visibility in 2018, to be anchored by existing and new higher-margins orders from MNC customers. This is alongside the subsiding component shortages and labour issues. Undemanding valuation with FY18E PER of only 11.4x vis-à-vis its EMS peers’ 14.0x PER offers an attractive entry level. Maintain OP with an unchanged TP of RM2.10.
Further details on 4Q17 results. Though record revenue was achieved in 2017, the group 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. For FY18/FY19, we have conservatively assumed RM3.90/USD as the new base case. Based on our sensitivity analysis, every 1% fluctuations in the USD from our new base case assumption of RM3.90/USD will impact Fwd. NP by c.2%. After a series of hiccups over the past few quarters, i.e. components shortages, limited labour resources, and client’s technical glitches on new system adoption alongside stringent impairment policy, the group is set to sail a smoother 2018 with the above issues now being resolved.
Staging for a stronger comeback. Management noted that the orders visibility and hit rates are better, thanks to its consistent delivery of good products quality and advanced manufacturing capabilities that appeal to customers with more advanced products. Beyond the healthy orders loading from its existing Telecommunication, Bar-code scanners and raw-cable customers which should continue to see at least midsingle digit growth in 2018, we gather that the group is also close to securing voluminous contracts in the industrial printing and production as well as medical segment. As these two contracts involve more complicated manufacturing processes, we believe that the margins should be higher and hence, should be able to help the group to weather through the weaker dollar (or stronger ringgit) environment. Based on our estimates, should these two contracts are secured timely mass production should be seen in 3Q18 onwards with full earnings contribution in FY19. All in, this should comfortably support our 2-year revenue/CNP CAGR of 17%/23%.
Maintain OUTPERFORM with an unchanged TP of RM2.10 (15.0x FY18E PER). We see better value proposition following the overdone share price correction, with its Forward PER trading at ony 11.4x, a 19% 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.
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 - 6 Mar 2018
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