3QFY20 NP came in at RM25.3m (+1.4% QoQ; +8.5% YoY), supported by higher sales during the period in conjunction with the year-end festive season. 9MFY20 NP of RM68.6m (- 10.7% YoY) was within our forecast but missed consensus estimates, accounting for 70% and 65% respectively. Increase FY21E NP by 7% to factor in higher contribution from the PCBA line. Maintain OUTPERFORM with a higher Target Price of RM1.56.

Within expectations. 3QFY20 NP came in at RM25.3m (+1.4% QoQ; +8.5% YoY), supported by higher sales (+13% YoY) during the period, in conjunction with the year-end festive season. 9MFY20 NP of RM68.6m (-10.7% YoY) was within our forecast but missed consensus estimates, accounting for 70% and 65% respectively.

Results highlight. YoY, 9MFY20 revenue climbed 7.1% thanks to stronger demand for its household products. However, NP slid 10.7% due start-up cost incurred for the additional capacity installed. Similar trend is seen on a QoQ basis as revenue rose 13% while NP inched 1.4% higher. The gestation period has mostly been completed and margins are expected to improve going forward.

No supply disruption. Management has always been proactive in managing supplies of raw materials. In the case of the Covid-19 outbreak, the group managed to stocked up sufficient supplies to weather through the entire month of February, ensuring that the production floor continue running as usual. With March supplies already shipping in, the group is on track to meet its targeted output.

Brighter prospects ahead can be expected after witnessing excellent sales recorded during Q3FY20. The management expects a continuity of positive sales for the subsequent quarter, supported by robust demand for the updated variant household product. The new variant is very well marketable thanks to its friendlier price tag that is able to penetrate a wider group of consumers.

Meaningful margin improvement can be seen in FY21F as the group’s PCBA line is expected to be well optimised for the production of the new variant household product. The group is also in the midst of getting qualified by its key customer to supply PCBA for other products that are currently in the group’s portfolio. We are positive on the group’s effort to be self-sufficient on PCBA, as it will better equip the group for more potential contracts given the key customer’s emphasis for its contract manufacturers to be vertically integrated.

Increased FY21E NP by 7% to RM139.4m to factor in higher contribution as the PCBA line achieves optimal efficiency.

Maintain OUTPERFORM with a higher Target Price of RM1.56 (previously RM1.46) based on an unchanged FY21E PER of 14.0x, in line with its 5-year mean.

Risks to our call include: (i) higher/lower-than-expected orders from its customers, (ii) higher/lower input costs, and (iii) single customer concentration risk.

Source: Kenanga Research - 28 Feb 2020