1Q19 NP missed, owing to slower uptake in conventional electrical appliances. Absence of dividends was expected. Even after our aggressive earnings cut for FY19E/FY20E, the current share price weakness is unjustified. At RM1.24 which is at its lowest level since the past three years, this implies forward FY19E/FY20E PER of 11.9x/10.9x which is at its trough level (also at 21% discount compared to peers). Maintain OP with a lower TP of RM1.45.

Below expectations. A soft 1Q19 net profit (NP) of RM25.7m (-10% QoQ; -23% YoY) was reported, which made up only 17% of our/consensus full-year estimates. While the 1Q is a seasonally softer quarter, weaker-than-expected revenue was reported which we believe was due to the new product focus from its customer, which is to shift away from its conventional electrical appliances (the product it is still producing). As expected, no dividend was declared for the quarter under review.

YoY, 1Q19 revenue dropped 18% on normalisation from the high base in 1Q18, alongside a slower uptake in conventional electrical appliances. With lower operational efficiency, EBIT margin compressed to 7.5% (0.8ppt), resulting in a further drop of 23% at its PATAMI level. QoQ, 4Q18 revenue dropped 8% which we believe was due to the weaker seasonality, aggravated by lower sales of conventional electrical appliances. While EBIT margin improved 0.8ppt to 7.5% on better yielding with improvement in manufacturing process, NP dropped 10% on normalized ETR of 23.1% (vs. 12.8% in 4Q18 when the group utilized its special reinvestment allowances).

Stronger quarter sequentially; with new PCBA services to be another silver lining. While we are cognisant of the softening revenue trend in the recent quarters (which we believe is due to the slower uptake in conventional electrical appliances), we believe 2Q19 should see a recovery with the saving grace being a stronger season (longer working months alongside stocking-up activities by its customers in tandem with festivities). Meanwhile, PCBA services which will see commencement in Sept/Oct 2018 should be another silver lining on potential of winning new contracts alongside better profitability.

Share price weakness is unjustified. Post results, we cut our FY19E/FY20E CNP to RM130m/RM142m (-13%/-13%) to account for lower revenue from the conventional electrical appliances. Even after our aggressive downward revision, we still opine that the current share price weakness is unjustified. At RM1.24 which is at its lowest level since the past three years, this implies forward FY19E/FY20E PER of 11.9x/10.9x which is at its trough level (also at 21% discount compared to peers). Note that this is all against the re-rating catalysts with PCBA being: (i) the margin enhancer (which we have yet to account into our FY19E/FY20E numbers after our new revision), and (ii) the vertical integration process will help the group in winning new contracts going forth.

Maintain OUTPERFORM with a lower TP of RM1.45 (from RM1.70). All in, our TP is lowered to RM1.45, still based on a targeted PER of 14.0x (on FY18E), a valuation which is in line with the industry’s forward average.

Source: Kenanga Research - 27 Aug 2018