1H19 NP missed expectation, owing to slower sales in conventional electrical appliances. Absence of dividends was expected. Share price weakness is unjustified, even after further earnings cut for FY19E/FY20E. At RM1.08 which is its lowest level for the past three years, this implies forward FY19E/FY20E PER of 11.3x/9.6x which is at trough levels (also at 24% discount compared to peers). Maintain OP with a rollover TP of RM1.35.

Below expectations. A mediocre 2Q19 with net profit (NP) of RM28.1m (+9% QoQ, -20% YoY), bringing 1H19 NP to RM53.9m (- 21%) which made up only 41%/40% full-year estimates. The main culprits were the dwindling uptake of its conventional electrical appliances as well as slower-than-expected new contracts replenishment. As expected, no dividend was declared for the quarter under review.

YoY, 1H19 revenue dropped 19% on normalisation from the high base in 1H18 (with 2Q18 as a record quarter), alongside a slower uptake in conventional electrical appliances following the shift of its main customer to the evolutionary model. With lower operational efficiency, EBIT margin compressed to 7.4% (0.6ppt), resulting in a further drop of 21% at its PATAMI level. QoQ, 2Q19 revenue improved 11% on stronger seasonality in tandem with year-end sales. With stable EBIT margin of 7.3% (-0.2ppt) and ETR of 23.5% (+0.4ppt), NP improved by a similar quantum of 9%.

Look beyond the short-term hiccup. While we are cognizant of the softening revenue trend on new product focus from its main customer, we remain positive of the group securing new contracts after the commencement of its PCBA services in Feb 2019. Recall that the group still has c.50% of floor space to cater for new contracts while consolidating its Vertical Integration status (with PCBA + Battery pack capability) to improve the strike rate of clinching more new contracts. Post results, we cut our FY19E/FY20E CNP to RM119m/RM140m (- 8%/-1%) to account for lower revenue from the conventional electrical appliances. Even after our further downward revision, we still opine that the current share price weakness is unjustified. At RM1.08 which is its lowest level for the past three years, this implies forward FY19E/FY20E PER of 11.3x/9.6x which is at trough levels (also at 24% 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 RM1.35 (from RM1.45). All in, our TP is lowered to RM1.35, based on a rollover FY20E PER of 12.0x. Note that the PER ascribed (from 14.0x previously) represents a -1SD below its 3-year forward PER. Even on a conservative valuation, our TP warrants total c.30% upside (alongside dividend yield of c.5%. Maintain OP. Risks to our call include: (i) lower-than-expected orders from its customers, (ii) higher input costs, and (iii) single customer concentration risk.

Source: Kenanga Research - 30 Nov 2018