D&O delivered yet another all-time high quarterly earnings in 4QFY20 with PATAMI of RM30.3m (+119% YoY), bringing FY20 PATAMI to a record high of RM49.7m (+42% YoY). The numbers exceeded our/consensus full year estimates by 20%/34%. We expect products demand to remain elevated in FY21, fuelled by the continuation of strong car sales and increased adoption of interior and exterior LEDs. We raise FY21E earnings by 23% to RM100.5m. Maintain OUTPERFORM with a higher Target Price of RM4.20.

Above expectations. D&O delivered yet another all-time high earnings as 4QFY20 PATAMI came in at RM30.3m (+106% QoQ; +119% YoY), bringing FY20 PATAMI to RM49.7m (+42% YoY). The number exceeded ours and consensus full year estimates by 20% and 34% respectively.

YoY, revenue for 4QFY20 surged 39% to RM209.6m on a huge spike in car sales globally due to pent up consumer buying as the pandemic gradually eases. 4QFY20 PATAMI jumped 119% to RM30.3m thanks to better cost control which is evident by a stronger EBIT margin of 19.3% (+6ppts). Despite being dragged down in the 1HFY20 by the pandemic lockdowns, FY20 logged a record high PATAMI of RM49.7m (+42%) on a 14% climb in revenue to RM576m. QoQ, 4QFY20 revenue jumped 32% as PATAMI logged a new record of RM30.3m, doubling from its previous quarter.

Elevated demand to persist in FY21. Going into 1QFY21, we expect the group to continue its QoQ earnings growth trend as the order pipeline remains robust. In addition to the 9% YoY growth for global light vehicle sales forecasted by HIS Markit, the group is receiving more business wins for both interior and exterior lighting as automotive makers look to constantly improve the aesthetic and safety of their vehicles with longer range headlamps, better rear combination lamps, larger infotainment system as well as digitalising the instrument cluster. FY21 will be the first year of adoption for D&O’s proprietary Smart LED by high end electric vehicle (EV). We expect the initial contribution to be less than 5% of group revenue, meaning that there is still room for growth as adoption penetrates into the mass production models. As one of the pioneers of smart RGB, D&O is well positioned to reap the benefits as car makers adopt the 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 FY21E PATAMI by 23% to RM100.5m and introduce FY22E PATAMI of RM121.9m, representing 102%/21% growth, respectively.

Maintain OUTPERFORM with a higher Target Price of RM4.20 (previously RM3.40) based on 48x FY21E PER at +2SD 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 Feb 2021