Kenanga Research & Investment

D&O Green Technologies - Positioning for Growth

Publish date: Mon, 24 Jan 2022, 08:48 AM

We believe the recent price correction serves as a good opportunity for investors to build position as the group is on track for a stronger 4QFY21. In addition, 1QFY22 may continue to see elevated demand due to an influx of orders, defying seasonal trend. D&O has started pulling in equipment for Plant 2 that is slated to commence operation in 2QCY22 which will cater for a slew of upcoming EVs, including the world’s bestselling pickup. We maintain our OUTPERFORM call with an unchanged TP of RM6.60.

On track for a stronger 4Q. We came away from a meeting with the management last Friday reassured that its business operation remains healthy and demand for its automotive LEDs (both interior and exterior) will continue to see strong momentum. In tandem with a seasonally stronger year-end quarter, we are sanguine that the group is on track to meet our FY21E CNP of RM110.9m in which we are estimating a CNP of RM39m for 4QFY21.

Setting up Plant 2. Despite aggressive expansion in Plant 1, we learnt that the influx of orders towards end-2021 has outpaced the group’s capacity, resulting in backlogs spilling over into 2022. This means that 1QCY22 may continue to experience elevated utilisation rates, defying the seasonal trend of a weaker 1Q. In anticipation of growing demand, the group has begun pulling in equipment for its Plant 2 (c.250k sq ft) which will commence operation in 2QCY22. Thanks to the group’s proprietary triple deck encapsulation system, Plant 2 will be able to cater for customers’ demand until 2025 where Plant 3 (c.330k sq ft) is expected to be ready for new cutting-edge automotive LEDs.

EV race is on. With regulators around the world pushing for lower carbon emission figures, we believe that the race towards electric vehicle production will continue to intensify in 2022. According to a recent study by Allied Market Research, the global electric vehicle market was valued at US$162.3b in 2019 and is projected to hit US$802.8b by 2027, representing a CAGR of 22.6%. Recognising the trend, D&O has aligned its product offerings to cater for the electric vehicle market as evident by the group’s strong pipeline of design-in and design-win. In the recent article by Electrek on the most anticipated electric vehicles coming in 2022, D&O is involved in almost all those models including the bestselling pickup truck in the world.

Maintain FY21E/FY22E core PATAMI of RM110.9m/RM148.5m. With all-time high earnings for FY21 already in the cards, we expect to see another record-breaking performance in FY22 on the back of overwhelming automotive demand.

Maintain OUTPERFORM and Target Price of RM6.60 based on FY22E PER of 53x, at +2SD to its 3-year mean. We believe our premium valuation is justified by its growth prospects and strong market presence. As such, we view the recent shares sell-down as a good opportunity for investors to build position.

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

Source: Kenanga Research - 24 Jan 2022

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