Upgrade TP to RM2.00 (32% upside). D&O delivered an alltime high quarterly earnings as 3QFY20 PATAMI came in at RM14.7m (+63.4% YoY), bringing 9MFY20 core PATAMI to RM19.3m (-8% YoY). While only representing 57%/60% of our/consensus estimates, we deem it to be in line as we expect back-to-back record earnings in the subsequent 4Q. D&O is experiencing pent-up demand from China car sales as well as strong orders from Europe. We raise FY20E/21E earnings by 10%/19% to account for more design wins coupled with the gradual adoption of its smart RGB which is more lucrative than the standard RGB. Maintain OUTPERFORM with a higher Target Price of RM2.00.

Within expectations. D&O delivered an all-time high earnings as 3QFY20 PATAMI came in at RM14.7m (+63.4% YoY), bringing 9MFY20 PATAMI to RM19.3m (-8% YoY). While only representing 57%/60% of our/consensus estimates, we deem it to be in line as we expect its record breaking feat to continue in the upcoming 4Q.

YoY, revenue for 9MFY20 inched 3.5% higher to RM366.8m despite being plagued by the movement control order (MCO). This was possible due to new business wins (thanks to improved customer’s acceptance of the group’s product) as well as a surge in demand from existing customers. This led to a PATAMI of RM19.3m, narrowing the YoY gap to 8%. QoQ, 3QFY20 revenue jumped 78.2% as PATAMI came in at RM14.7m (vs. RM0.7m in 2Q) as the group is back to full operations.

Back-to-back record earnings incoming. Going into 4QFY20, we expect the group to continue the QoQ growth trend. Essentially, we are forecasting a 7.7% YoY growth for FY20E PATAMI, despite the global pandemic. The group is experiencing a surge in orders from China automotive market with robust demand extending the car sales trajectory on a 7-month growth streak, with Oct recording 9.3% growth YoY. Electric vehicle sales in China grew at a faster pace of 104% YoY in Oct.

LED per vehicle is expected to increase as car makers emphasize 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, resulting in better contrast, and lower power consumption which is a vital utility attribute for electric vehicles to extend their driving range. 

Raise FY20E and FY21E core PATAMIs to RM37.6m and RM63.8m, respectively. We expect another record quarter in the subsequent 4Q and a 70% growth in FY21.

Maintain OUTPERFORM with a higher Target Price of RM2.00 (previously RM1.20) based on higher 35x FY21E PER (previously 25.3x), at +1.5SD to its 3-year mean to reflect improving prospects ahead. Being a renowned brand name in full range automotive LED, we believe D&O is a prime proxy to the potential boom 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 - 25 Nov 2020