FY18 NP came in line, so was the absence of dividend. While we are cognisant of its slowing sales trend in recent quarters, we believe upcoming PCBA services is its saving grace; with better profitability alongside the potential of winning new contracts. Post model updates, we cut our FY19E CNP by 12% to account for slower sales in its conventional household products. All in, our TP has been lowered to RM1.85 @ 15.0x FY19E PER. Still an OP.

Within expectations. The group reported a softer 4Q18 net profit (NP) of RM28.5m (-5% QoQ; -11% YoY), concluding its FY18 with a NP of RM127.0m (+23% YoY) which made up 96% our/consensus full-year estimates. As expected, no dividend was declared for the quarter under review. Note that the group usually pays its final dividend by end of July/early August; with dividend pay-out of no less than 50% as per its dividend policy. We are expecting the group to pay DPS of 5.3 sen for FY18 based on a pay-out ratio of 51%.

YoY, FY18 revenue grew by 8% driven by: (i) second tranche of household electrical appliances (floor cleaning) contracts, and (ii) full contribution from the new revolutionary products (beauty tools). Meanwhile, EBIT margin improved by 0.5ppt to 7.6% alongside the subsiding cost pressures (in the absence of last minute hiring of higher cost contract workers in 1Q17 to meet high orders) coupled with the continuous yield improvement on lower wastage. Coupled with lower ETR of 21.7%, NP improved by 23% (with NPM of 6.0%). QoQ, 4Q18 revenue dropped by 10% which we believe was due to slower ramp-up in its conventional household (floor-cleaning) electrical appliances. While EBIT dropped further by 20% on operational deleveraging, PATAMI decreased by only 5% thanks to lower ETR of 13% (on utilisation of special reinvestment allowances).

New PCBA services to be its saving grace. While we are cognisant of the softening revenue trend in recent quarters (which we believe was due to the slower uptake in its conventional floor-cleaning electrical appliances), we believe upcoming PCBA services, which will see commencement in 3QCY18 will be its saving grace; with better profitability alongside the potential of winning new contracts. Meanwhile, the orders for its main revenue drivers- the Beauty products and portable Household products are still intact. This should contribute at least RM1.7b/RM1.9b in FY19/FY20 that will anchor 2- year revenue CAGR of 10% even after its high base in the recent years.

Maintain OUTPERFORM with a lower TP of RM1.85 (from RM2.05). Post model updates, we cut our FY19E CNP by 12% to account for lower revenue from the conventional floor-cleaning electrical appliances, to be on the conservative side. Even so, with the CNP margin assumption of 6.3%, a meager improvement from its 6.0% (in FY18), CNP is expected to grow by 18% (the lower range in its historical 4-year CNP growth, ranging from 19-44%). Meanwhile, we also introduced our FY20E CNP of RM163.6m (2-year NP CAGR of 13%).

All in, our TP is lowered to RM1.85; still based on a targeted PER of 15.0x (on FY19E), a valuation which is in line with the industry’s forward average. Besides the decent total upside of 21%, other attributes such as: (i) the solid 2-year CNP of 13%, (ii) stable earnings visibility, (iii) decent dividend yield of 3.9% as well as the (iv) cost pass- through mechanism (which sheltered the group from the currency fluctuations) are stabilizing factors that appeal to investors in the technology space.

Source: Kenanga Research - 31 May 2018