4QFY19 CNP of RM13.4m (-20% QoQ; -32% YoY), brings FY19 CNP to RM40.3m (-4.2% YoY), which is within expectations, accounting for 103%/105% of our/consensus’ estimates. The decline in 4Q was due to low-margin communication products which will be discontinued, freeing up capacity for new potential customers, preferably for higher margin products. Hence, moving forward, we expect earnings to improve and keep our FY20E CNP at RM45.4m. Maintain MARKET PERFORM with an unchanged Target Price of RM1.40.

Within expectation. 4QFY19 registered CNP of RM13.4m, representing a decline of 20% QoQ and 32% YoY due to the production of low-margin telecommunication products. FY19 CNP of RM40.3m (-4.2% YoY) came in within expectations, accounting for 103%/105% of our/consensus’ estimates.

Results’ highlight. FY19 revenue dipped 0.3% YoY to RM659m as better sales in the EMS segment (+5% YoY) was offset by lower contribution from the raw wire & cable segment (-12% YoY) and wire harness segment (-7% YoY). Meanwhile, FY19 CNP fell by a larger quantum of 4.2% YoY due to the production of low-margin communication device.

Weeding out low-margin customer. Moving forward, the group is expecting to phase out the low-margin communication device from its production portfolio in order to free up capacity for better-margin products. The group is in discussion with a few prospective customers who are looking to shift their supply chain out of China to Malaysia due to the long standing US-China trade spat. Not wanting to risk taking on more jobs at the expense of margin erosion, the group is being very selective on taking new customers. No details were disclosed but based on our channel checks, a prospective customer could be a MNC that offer stable volume with no production seasonality. In any case, we believe this could only take place in 2HFY20 as shifting production out of China may take some time, more so with the current Covid-19 outbreak. Meanwhile, contributions from existing customers are expected to increase, albeit at a modest pace.

Maintain FY20E CNP of RM45.4m. Maintain MARKET PERFORM with an unchanged Target Price of RM1.40 based on an unchanged 12.0x FY20E PER. We believe prospects from existing customers are already priced in.

Risks to our call include: (i) lower/higher-than-expected sales, (ii) loss of orders from its key customers, and (iii) adverse/favourable currency translations

Source: Kenanga Research - 2 Mar 2020