INVESTMENT MERIT

QES Group Berhad (QES) is slated for listing on ACE market today at an IPO price of RM0.19/share. The group is expected to register a 2-year CNP CAGR of 15%, underpinned by; (i) strategic exposure in high growth segments as well as its wide customers and installed base (distribution division), and (ii) incremental sales with new products from higher-margin manufacturing division. TRADING BUY with a FV of RM0.260 (12.0x FY18E PER).

Established equipment distributor and manufacturer. QES is principally involved in the distribution of inspection, test and measurement equipments, materials, and engineering (87% of FY17 revenue) as well as manufacturing of optical inspection equipment and automated handling equipment (13% of FY17 revenue). To date, QES has >2,400 customers and installed base of >8,000 units of equipment spreading across ASEAN and Malaysia with customers in E&E, Automotive and Semiconductor Industries (more details in table 5 & 6).

Well positioned in the industry uptrend. QES has registered a 3-year revenue/CNP CAGR of 22%/47%, which have significantly outperformed the mid-single digit growth of global/Malaysia’s test and measurement market. These were all on the back of its strategic exposure in high-growth sectors and resilient ASEAN market (which experienced higher growth in the recent years). Going forward, the global/Malaysia’s test and measurement markets are widely expected to grow at a 5-year CAGR of 5.7%/6.9% in 2021, stemming from demand in Telecommunication (wider adoption of 4G/new 5G technology), Semiconductor (IoT as well as electronic devices) and Automotive (higher electronic content) - all sectors that QES has exposure in. With QES’ (i) established customers and wide installed base, (ii) meaningful estimated market share of 9.2% in FY17 (among the listed ATE players) coupled with (iii) its strong portfolio exposure to MNC’s customers (table 2), we believe its growth will continue to outpace the positive industry trend, which should support our conservative 2-year revenue CAGR assumption of 13%.

Better portfolio mix to anchor growth. The group intends to utilise RM4.8m (or 16%) out of the RM28.8m proceeds raised within two years to develop three key products, namely FAVIS, AWPS and AWID (ATE that will be used at post-wafer dicing level by back-end semiconductor players- more details in table 5 & 6). Should the commercialisation is successful, we believe this should form the pillars of growth for its manufacturing division, which support our 2-year sales CAGR assumption of 16% in manufacturing division alongside higher GP margin of 38.1%. Note that 9M17 GP margin for manufacturing is already at 37.0% vs. its distribution’s GP margin of 35.9%. Meanwhile, for its distribution division, the group is looking to diversify its portfolio by penetrating into other market segments. This will be done through utilisation of RM8.3m proceeds to purchase 53 units of demonstration equipment for marketing to higher education institutions, petrochemical and pharmaceutical companies.

Trading Buy with a FV of RM0.260. We are projecting the group to register a 2-year CNP CAGR of 15% with key earnings assumption being; (i) 2-year revenue CAGR of 13% in its Distribution division (within the range of historical 2-year CAGR of 18%) in tandem with the positive outlook in the test and measurement market, (ii) maiden FAVIS, AWPS and AWID machines contribution in FY18E/FY19E (2-year revenue CAGR of 16%), (iii) USD/MYR assumption of RM3.90, and (iii) core NP margins assumption of 7.9%-8.0% in FY18/FY19. By ascribing a targeted 12x FY18E PER, a valuation which is broadly in line with the Forward PER of FBMSC Index, we derive a FV of RM0.260 which warrants a 37% upside from its IPO price. In terms of peers comparison, the ascribed valuation is also undemanding with a 31-58% discount from the Forward PER of ATE players.

Source: Kenanga Research - 8 Mar 2018