1Q18 CNP missed; with components shortages causing a delay in sales as well as operational deleveraging. While this industry-wide dampener should continue to tax existing products growth if not be addressed in the near term, we believe the upcoming new high-margin products should make up for the shortfall in 1H. Cut FY18E/FY19E by 17%/13%. Maintain OP with a lower TP of RM1.75 on cheap valuation as well as a recovery in 2H18.

Impacted by broad-base dampeners. While 1Q is typically the seasonally weakest quarter, a weaker-than-expected CNP of RM1.0m (- 88% QoQ; -89% YoY) was recorded, which only made up 2% of our/consensus full-year estimates. Note that CNP has been adjusted for the net reversal of receivables impairment amounting to RM6.4m and other immaterial items. The main culprit was the industry-wide passive components shortages (which are the key components for its key customers), which have resulted in weaker sales and thus lower operation efficiency. Worse still, currency trend was also not in favour with USD/MYR weakening against MYR by 6% QoQ and 12% YoY to average of RM3.92/USD.

Absence of dividend was expected in this quarter as the group typically declares dividends after its 4Q results. However, the recently declared FY17 dividend was a positive surprise; with a total 6.0 sen DPS (first and final net DPS of 2.4 sen plus a special dividend of 3.6 sen) which beat our FY17E DPS of 5.0 sen.

YoY, 1Q18 revenue decreased by 10%, dragged mainly by its manufacturing segment (-12%). We gather that while not much order revisions were made by key MNC clients, production and delivery were delayed due to the components shortages issues. With low operational efficiency alongside weaker USD, EBIT margin was compressed by 3.3ppt to 6.7%, resulting in a much weaker CNP of RM1.0m (-89%). QoQ, core NP dropped by 88% owing to lower loadings in 1Q18 amid weak seasonality (sales dropped by 21%) as well as operational deleveraging (EBIT margin dropped to 6.7%, -10.3ppts).

All shapes and sizes. While we understand that the late delivery is only a timing issue with orders volume still resilient, management noted that the continuous shortage of certain electronics component should continue to tax existing products growth if not addressed in the near term. That said, not all is doom and gloom as the group is already 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 better margins should boost the group’s profitability; with better earnings in 2H to make up for the shortfall in 1H.

Maintain OUTPERFORM with a lower TP of RM1.75 (15.0x FY18E PER), from RM2.10. To be on the conservative side, we have trimmed our bullish sales assumption, resulting in a cut in FY18E/FY19E CNP by 17%/13%. Even after the earnings revision, we still see better value proposition following the overdone share price correction, with its forward PERs trading at only 9.5-11.7x, a wide range of 17%-27% discount to closest EMS peers (which are trading at 11.5-16.1x forward 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.

Source: Kenanga Research - 28 May 2018