4QFY19 core PATAMI came in above expectations at RM13.9m (+21% YoY; +54% QoQ), bringing FY19 core PATAMI to RM34.9m (+14% YoY) which exceeded both our forecast and consensus by 6% and 3%, respectively. Better earnings were contributed by the rebound in Europe automotive sale which led to higher demand for rear combination lights (RCL). The group did not declare any dividend for the quarter, leaving the YTD dividend at 1.0 sen which is within our expectation. We keep FY20E core PATAMI at RM45.1m while introducing FY21E PATAMI of RM52.6m, representing a 2-year CAGR of 23%. Maintain OUTPERFORM with an unchanged TP of RM0.91.

Above expectations. 4QFY19 core PATAMI came in above expectations at RM13.9m (+21% YoY; +54% QoQ), bringing FY19 core PATAMI to RM34.9m (+14% YoY) which exceeded both our full-year forecast and consensus by 6% and 3%, respectively. The group managed to surpass expectations by recording its highest quarterly earnings thanks to the rebound in Europe automotive sale which led to higher demand for rear combination lights (RCL). EBIT margin also expanded by 3.3ppt QoQ to 13.3% thanks to demand for higher margin products. The group did not declare any dividend for the quarter, leaving the YTD dividend at 1.0 sen which is within our expectation.

YoY, revenue for FY19 inched up 2.8% YoY to RM504.3m. More importantly, automotive revenue (which constitutes 97% of group revenue) rose 5% YoY, which is an impressive feat considering the turbulent year for the automotive sector where global car sales volume declined 4.4%. We believe the rebound in Europe car sales towards the end of 2019 (December itself recorded 21% YoY growth) helped cushioned the slowdown in China car sales. While car sales in China are still in the red, the decline has been seen to be narrowing. Note that D&O’s prospect is not solely dependent on the growth of car unit sales, but the LED content per vehicle which will continue to increase as car manufacturer move towards electric vehicles (EV) and autonomous cars.

Confident for FY20. Optimism is anticipated to spill into FY20 as the company has received very encouraging orders. So far, the new coronavirus threat in China has not caused any delay or cancellation of orders. As one of the pioneers of smart RGB, D&O is well positioned to reap the benefits as car makers are moving towards such technology. Smart RGB yield higher ASP and allows for local dimming which results in better contrast and lower power consumption. With battery as the main power source for EVs, even marginal power saving from LED makes a difference in terms of driving range. Such savings become even more pronounced with the increase in LEDs per vehicle, in tandem with market trend to improve both safety and aesthetics.

Maintain FY20E core PATAMI at RM45.1m while introducing FY21E PATAMI of RM52.6m, representing a 2-year CAGR of 23%.

Maintain OUTPERFORM with an unchanged Target Price of RM0.91 based on an unchanged FY20E PER of 22.6x, representing +1SD above 2-year peers’ average. Being a renowned brand name for full range automotive LED, we believe D&O is a prime proxy for the potential recovery in the automotive market.

Risks to our call include: (i) disruption of components supply, (ii) replacement/obsolescence of LED technology, (iii) adverse currency fluctuations, and (iv) adverse foreign labour policy

Source: Kenanga Research - 27 Feb 2020