3QFY21 CNP came in below expectations at RM18.6m (-31% QoQ; +26% YoY), bringing 9MFY21 CNP to RM71.9m (+272% YoY) at 58% each of both our and consensus full-year estimates. Revenue fell 16% QoQ to RM174.6m due to plant closure totalling 24 days. With its entire workforce fully vaccinated, the group is prepared for its seasonally stronger 4Q and has recently expanded its capacity to pick up on backlogs as well as take on new orders. Maintain OUTPERFORM with a higher TP of RM6.60.

Below expectations. 3QFY21 CNP came in below expectation at RM18.6m (-31% QoQ; +26% YoY), bringing 9MFY21 CNP to RM71.9m (+272 YoY%). This represents 58% each of both our and consensus fullyear estimates.

QoQ, 3QFY21 CNP fell 31% QoQ to RM18.6m mainly due to lower utilisation rate and unabsorbed cost as a result of plant shutdown in July (10 days) and August (14 days). The shutdown was instructed by KKM as a measure to curb the higher number of positive Covid-19 cases in the area. 3QFY21 revenue fell 16% QoQ to RM174.6m as orders could not be delivered to customers. YoY, revenue for 3QFY21 climbed 10% while CNP grew 26% as demand for automotive LED remained strong. Cumulatively, 9MFY21 CNP leapt 272% to RM71.9m on a 61% increase in revenue to RM588.9m.

Shifting to high gear. With the plant closure chapter behind, we expect a better quarter sequentially as the group is entering its seasonally stronger quarter with a full workforce. In addition, the group has increased its capacity of Plant 1 since October to pick up on backlogs as well as taking on new orders during the year-end festive period. While the China Association of Automobiles Manufacturers (CAAM) and the European Automobile Manufacturers’ Association (ACEA) reported declining YoY car sales in recent months, we understand from our channel checks that this is not due to waning consumer demand but caused by the automotive chip shortage. Given that consumer demand remains strong, automotive makers are booking components in advance for up to two years for supply of automotive wafers. The effect has also trickled down to D&O where their order pipeline remains strong for FY22.

Preparing for long-term growth. The group has also planned to commence operation of its Plant 2 by 2QCY22 to take on more orders. In addition, its recent private placement has raised RM216m for the construction of an 8-storey Plant 3 which will be completed in 2-3 years’ time to be utilised for next-gen automotive LED.

We trim our FY21E CNP by 9.9% but raise FY22E CNP by 3.9% to RM110.9m and RM148.5m, respectively, to factor in the plant shutdown as well as backlog spilling over into FY22.

Maintain OUTPERFORM with a higher Target Price of RM6.60 (previously RM6.00) based on higher 53x (previously 48x) FY22E PER at +2SD to its 3-year mean to reflect the promising prospects of the automotive space for the next three years.

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

Source: Kenanga Research - 25 Nov 2021