We maintain our POSITIVE stance after a meeting with management, premised on stronger 2H19 prospects from: (i) easing component shortage issues, (ii) seasonal ramp-up and higher allocation from its existing Telecommunications customer, and (iii) a slew of new customers on boarding. Post-meeting, we made no changes to our earnings estimates. Maintain OUTPERFORM with an unchanged Target Price of RM1.90 based on 14.0x FY19E PER.

Easing component shortage issues. The group is unlikely to face issue with component shortages in 1H19 as it has already stocked up for 3 months ahead (vs. usual practice of 1-2 months). However, management cautioned the possibility of the issue resurfacing in 3Q, should the adoption of 5G gains momentum. We believe that management would be more prepared this time, with better raw material management.

Trade war beneficiary – exciting prospects. Due to a shift in a new customer’s supply chain motivated by the US-China trade war, the group has engaged the former and started its maiden telecommunication device with its first shipment completed, while its second shipment close behind. Management expects contribution of its maiden telecommunication device to become meaningful by end of 3Q19. We understand that the end customer is a major retail name, from which the group has already obtained 3 certifications, which could usher in additional contracts. The group is currently working with its direct customer to develop a new audio-related accessory to be integrated into the abovementioned telecommunication device to be sold as a premium product. Apart from this, we have also gathered that another new customer has engaged the group to manufacture PCBA for its white goods on a consignment basis. We are upbeat about the group’s medium-term prospects given the slew of new customers in the pipeline.

Expecting a stronger 2H19 to make up for 1H19. While 1Q19 is likely to be a weaker quarter on seasonality and higher start-up costs for its new products, we expect earnings to pick up in 2H19 to make up for the shortfall, premised on: (i) seasonal ramp-up alongside higher allocation from its Telecommunication customer, (ii) mass production of its new products (industrial printing & production and medical segment) with full- year earnings contribution in FY19, (iii) contribution from its maiden telecommunication device from end-3Q19 onwards, and (iv) steady growth from its existing key customers. The abovementioned should be able to comfortably support our estimated 2-year revenue/CNP CAGR of 11%/15%.

Earnings unchanged. Post-meeting, we made no changes to our FY19- 20E earnings.

Maintain OUTPERFORM with an unchanged Target Price of RM1.90 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.

Risks to our call: (i) slower-than-expected sales, (ii) loss of orders from its key customers, (iii) severe components shortages, (iv) labour issues, and (v) adverse currency translations.

Source: Kenanga Research - 06 Mar 2019