FY18 results came above expectations due to stronger EMS order recovery, lower effective tax rate and higher contribution from new contracts. No dividend was declared, as expected. Upgrade FY19E earnings by 11% as we raise sales by 3% on stronger EMS order recovery and tweaked CNP margin to 6.7%. Maintain OUTPERFORM with a higher Target Price of RM1.90 (from RM1.70).

4Q18 above expectations. An unexpectedly strong 4Q18 CNP of RM19.7m (+38% QoQ; +138% YoY), brought FY18 CNP to RM42.4m (+0.1%), making up 121%/103% of our/consensus full-year estimates. We believe this was mainly due to: (i) lower-than-expected effective tax rate, (ii) stronger-than-expected EMS orders recovery from its Telecommunication customer, (iii) higher-than-expected contribution from its new products (industrial printing and production & medical segment), and (iv) higher-than expected margins as its higher margin new products constituted a larger portion of its revenue. No dividend was declared, as expected.

Results Highlight. YoY, FY18 revenue declined 3%, mainly due to its manufacturing segment (-3%). While we understand that production and delivery was delayed in 1H18 due to components shortage issues, the recovery in 2H18 on the back of stronger EMS orders (from its Telecommunication customer) made up for the shortfall in 1H18. FY18 CNP of RM42.4m was marginally higher (+0.1%) than FY17 CNP of RM42.3m stemming from a lower effective tax rate (22.1% vs FY17 of 24.3%), which improved CNP margin (0.2ppt) to 6.4%. QoQ, revenue leapt 15% to RM200.0m driven by: (i) EMS orders recovery from its Telecommunication customer, and (ii) higher contribution from its new products. Meanwhile, CNP jumped by a larger quantum of 38% to RM19.7m due to: (i) lower effective tax rate, (ii) better product mix, and (iii) stronger USD/MYR (+2% to RM4.17/USD averagely).

All eyes on 1Q19 as it could see higher earnings premised on: (i) higher allocation from its Telecommunication, Bar-code scanners and raw cable customers, (ii) higher contribution from new products (industrial printing, medical segment) which should fetch higher margins as it involves more complicated manufacturing processes, and (iii) margin improvements from subsiding component shortage issue. Mass production of these new products with full earnings contribution in FY19 and steady growth from its existing key customers as mentioned above should be able to comfortably support our estimated 2-year revenue/CNP CAGR of 11%/15%.

Upgrade FY19E earnings by 11% as we raised revenue by 3% and tweaked CNP margin (+0.5ppt) to 6.7% in anticipation of higher EMS orders recovery from its Telecommunication customer and margin improvements from new contracts. Meanwhile, we introduce FY20E earnings of RM56.6m.

Maintain OUTPERFORM with a higher Target Price of RM1.90 (from RM1.70) based on (14.0x FY19E PER). We think that there is good value proposition at current price level, with its Forward PER at only 12.0x, at a 15% discount to its closest EMS peers which is trading at 14.0x 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. Maintain OUTPERFORM.

Source: Kenanga Research - 28 Feb 2019