D&O is expected to chart yet another record quarter to be followed by a blockbuster FY21 as the group is overwhelmed by orders beyond its current capacity, above 2-3x the forecast volume provided by key customers. As such, capex plans have been brought forward to expand capacity by 25%. Therefore, we expect sterling YoY growth for the next five quarters owing to intensifying car sales and gradual adoption of smart RGB lighting which yields higher margin. Maintain OUTPERFORM with an unchanged TP of RM2.00.

Overwhelming orders. We came away from a post-results meeting with the management feeling pumped-up for D&O’s prospects. In line with the group’s previous guidance for a better 2HFY20, the group is on track to deliver yet another record breaking quarter in the upcoming 4Q. Since returning to full capacity in June, the group has been receiving overwhelming orders beyond its current capacity, to the extent of 2-3x higher than forecast volume provided by key customers. As such, the group is bringing forward a portion of its capex to increase capacity by 25%. We gather that the demand was driven by increased implementation of infotainment systems even in entry level car models as well as a growing demand for its exterior LED, notably the rear combination lamps (RCL).

More business wins. Despite the global pandemic, D&O’s proven capability and quality have enabled the group to continue securing more business wins. One notable win is a well-known EV customer which qualified D&O within months (which is unprecedented) instead of the standard procedure which usually takes years. Given that the order forecast from key customers extends until 2025, the group expects the new plant to be fully occupied by then. The new plant is 50% larger than the existing plant of 183k sq ft and is now only housing the administrative staff while the existing plant is fully converted for production.

Solid FY21. With China’s car sales on a 7-month growth streak while Europe is charting a strong rebound, we expect the momentum to continue into FY21. We believe that the group’s seasonally weaker 1H may not play out this FY21. Barring any unforeseen circumstances, we believe the group is capable of delivering YoY increase for the next five quarters ahead. In addition to rising car sales, LED per vehicle is also expected to continue rising, with electric vehicles and driverless cars in particular leading the way. Having the first-mover advantage in smart RGB, D&O is well positioned to reap the benefits as car makers are starting to adopt such technology. Smart RGB yields higher ASP and allows for local dimming which results in better contrast and lower power consumption.

Maintain FY20E/FY21E core PATAMI of RM37.6m/RM68.8m.

Maintain OUTPERFORM with an unchanged Target Price of RM2.00 based on FY21E PER of 35x, at +1.5SD to its 3-year mean.

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

Source: Kenanga Research - 26 Nov 2020