9M18 results came in line, so was the absence of DPS. Though industry-wide components shortages (both passives and actives) are still looming, 3Q18 saw signs of orders recovery from the EMS side. Meanwhile, new contracts with higher design flexibility and complexity should fend off the systemic impact, with full fruition to be seen in FY19. No changes to our FY18E/FY19E earnings. Maintain OP with an unchanged TP of RM2.00.

Within expectations. A strong 3Q18 CNP of RM14.3m (+104% QoQ; +8% YoY), bringing 9M18 CNP to RM22.3m (-34%) which made up 50%/48% of our/consensus full-year estimates. We deemed the results to be within expectations as typically, the financial 3Q and 4Q will see much better earnings on higher seasonal ramp-up alongside contributions of new products starting from 3Q18 onwards. Meanwhile, we understand that the sales momentum is still strong, which should make up for the shortfall in 1H18. Absence of dividend was expected in this quarter as the group typically declares dividends after its 4Q results.

YoY, 9M18 revenue decreased 7%, owing mainly to its manufacturing segment (-8%). 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, adjusted EBIT margin was compressed by 1.3ppt to 7.1%, resulting in a much weaker CNP of RM22.3m (-34%). However, note that stronger CNP in 3Q helped in narrowing up the gap, which was on the back of stronger EMS orders. QoQ, while revenue surged 23% to RM174.4m driven by EMS orders recovery from its Telecommunication customer, CNP surged by 104% which we believe was driven by better product mix and stronger USD/MYR (+4% to RM4.09/USD averagely).

Stronger 4Q18 to make up for the shortfall. While 1H18 remained soft (due to exceptionally weak 1Q18 results), seasonal ramp-up alongside higher allocation from its Telecommunication, Bar-code scanners and raw cable customers should help the group to achieve a mid-to-high single-digit top-line growth for FY18. To fend off the ongoing systemic impact (components shortages), the group is also looking at new contracts by putting higher capex allocation of RM12m in FY18 (vs. previously guided RM5m, for more SMT lines). As the new contracts, i.e. industrial printing and production as well as medical segment, involve more complicated manufacturing processes with sizeable volume, we believe that the margins should be higher and hence, should be able to help the group weather through the weaker dollar (or stronger ringgit) environment. Mass production could be seen earliest by 4Q18 with full earnings contribution in FY19 to comfortably support our estimated 2- year revenue/CNP CAGR of 11%/14% with the expectation of the subsiding component shortage issue.

Maintain OUTPERFORM with an unchanged TP of RM2.00 (14.0x FY19E PER). We still see good value proposition at current price level, with its Forward PER at only 11.0x, at a 11% discount to its closest EMS peers which is trading at 12.3x PER. Note that this is all against the backdrop of its relatively higher NP margin, more advanced manufacturing capabilities as well as having strong parentage support from Foxconn Technology Group, which we think is unjustified. Maintain OUTPERFORM.

Source: Kenanga Research - 7 Nov 2018