2QFY21 CNP came in line with expectations at RM26.8m (+1.1% QoQ; +3,805% YoY), bringing 6MFY21 CNP to RM59.8m (+1,058%). This represents 41%/43% of our/consensus full-year estimates. Revenue remained robust at RM208.6m (+1.5% QoQ) despite the FMCO with orders lined up until Jan 2022. We anticipate a stronger 2H on the back of solid global demand for automotive LEDs. Maintain OUTPERFORM with a higher TP of RM6.00.

Within expectations. 2QFY21 CNP came in largely in line with expectations at RM26.8m (+1.1% QoQ; +3,805% YoY), bringing 6MFY21 CNP to RM59.8m (+1,058%). This represents 41% and 43% of our and consensus full-year estimates, respectively.

YoY, revenue for 2QFY21 surged 134% to RM208.6m as automotive LEDs sales continued to recover strongly, with China being the leader. This led to a 3,805% jump in 1QFY21 CNP to RM26.8m as the group enjoyed economies of scale from higher plant utilisation rate. In addition, the group has also embarked on factory automation which reduces its reliance on physical labour; this was reflected in the gross profit (+5.4ppt) and EBIT margins (+13.9ppt). QoQ, despite the 60% workforce restriction, CNP still inched 1.1% higher, thanks to the group’s capability in efficient labour allocation and cost control. Note that D&O’s gross profit margin even improved 0.8ppt QoQ to 30.6% while EBIT margin inched 0.4ppt higher QoQ to 18% in spite of all the challenges faced during the FMCO.

Fully booked for the year. The group’s pipeline is currently full until Jan 2022 as customers continue to provide a strong flow of orders for its automotive LEDs. This is in tandem with global car sales as the China Association of Automobiles Manufacturers (CAAM) reported 19.3% YoY growth for Jan-July 2021. Similarly, Europe car sales grew 25.2% YoY for Jan-June 2021 as more countries achieved higher vaccination rates and car showrooms have reopened.

Still a favourite for automotive play. While the group had an unexpected MCO disruption in 3QFY21, we believe it was merely a minor setback which will be cushioned by stronger performance subsequently. To prepare for its seasonally stronger 4QFY21, the group is currently expanding its capacity which will increase its output by up to c.25%. We continue to like D&O for its competitive edge in the automotive LED market to continuously generate business wins as it gains more traction among Tier-1 automotive customers.

We fine-tune our FY21E/FY22E CNP forecast by -6.3% and -2.0% to RM123.1m/RM142.9m to factor the MCO disruption in 3QFY21.

Maintain OUTPERFORM with a higher Target Price of RM6.00 (previously RM5.50) based on 48x rolled-forward FY22E 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 on-going 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

Source: Kenanga Research - 26 Aug 2021