2QFY20 core PATAMI came in at RM0.7m (-89% YoY; -73% QoQ), bringing 1HFY20 core PATAMI to RM4.6m (-62% YoY). While only representing 15% of both our and consensus estimates, we deem it to be in line as we believe the worst is over and expects a far superior performance in the 2H. The group has recovered to full capacity in June and is seeing strong orders owing to pent-up demand from China car sales which has staged growth for four consecutive months, while Europe is seeing encouraging rebound in car sales. Maintain OUTPERFORM with higher TP of RM0.965.

Within expectations. 2QFY20 core PATAMI came in at RM0.7m (-89% YoY; -83% QoQ), bringing 1HFY20 core PATAMI to RM4.6m (-62% YoY). While the numbers only represent 15% of both our and consensus estimates, we deem it to be in line as we believe the worst is over and expects the a far better performance in the 2H as the group regain full operations.

YoY, revenue for 1HFY20 fell 9% to RM207.4m as the group was largely impacted by the movement control order (MCO) where it was limited to 20% workforce followed by a gradual increase to 50%. This has caused some inefficiencies due to underutilised production space during the period which resulted in lower gross profit margin of 25% vs. 27% in 1HFY19. QoQ, PATAMI fell 83% on a 25% decline in revenue. The large decline can be explained by the impact of MCO which was mostly felt in the 2Q as compared to the 1Q.

Better 2H. We believe that the worst is over for D&O and expects a significantly better 2H with subsequent quarters to see continuous QoQ growth. The group has recovered to full capacity in June and is seeing strong orders owing to pent-up demand from China automotive market as well the Europe automotive market. China being the first to curb the Covid-19 spread has staged a V-shaped recovery in automotive sales and has also marked its fourth consecutive monthly growth as sales rose 16.4% YoY in July, raising expectation that the slump in auto sales could be ending. Over in Europe, car sales have also displayed encouraging recovery coming off the low of -76% YoY in April to -22% YoY in June, thanks to the lifting of restrictions and attractive rebates. We also noted that both regions are experiencing increasing demand for electric vehicles, in line with government policies to reduce carbon emission.

LED per vehicle is expected to increase as car markers emphasis more on electric vehicles and driverless vehicles. As one of the pioneers of smart RGB, D&O is well positioned to reap the benefits as car makers adopt such technology. Smart RGB allows for local dimming which results in better contrast and lower power consumption. This works in favour with electric vehicles which are dependent on battery for its driving range.

Maintain FY20E and FY21E core PATAMIs of RM29.9m and RM42.9m, respectively. We believe the current quarter to be the bottom of a U-shape recovery and expects a strong 2H to pick up the pace.

Maintain OUTPERFORM with a higher Target Price of RM0.965 based on higher 25.3x FY21E (previously 22.6x), in line with its 3-year mean to reflect improving prospects ahead as the worst quarter is over. Being a renowned brand name in 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 - 26 Aug 2020