1QFY22 CNP came in within expectation at RM30.5m (-21.1% QoQ; +15.1% YoY), representing 21%/20% of our/consensus estimate. Revenue slid 6.2% QoQ on inefficiencies resulting from an unexpected surge in Omicron cases among employees. Thankfully, the infection rate has declined, and D&O is optimistic for the coming quarters as design-in activities are on a rise. To cater for more orders, new equipment is being installed in Plant 2 as the group aims to commence operations in 3QFY22. Maintain OUTPERFORM with an adjusted TP of RM5.40.

Within expectations. 1QFY22 CNP came in within expectation at RM30.5m (-21.1% QoQ; +15.1% YoY), representing 21% of our, and 20% of consensus, full-year estimate.

Results highlight. QoQ, 1QFY22 revenue slid 6.2% to RM241.6m which is in line with the group’s business trend given the shorter operating period due to the Chinese New Year holidays. 1QFY22 CNP declined at a quicker pace of 21.1% as production was intermittently disrupted by the rapid spike in Covid-19 Omicron variant cases amongst the employees. The group had to carry out quarantine procedures which resulted in a decline in overall production efficiency. YoY, revenue for 1QFY22 jumped 17.5% while CNP grew 15.1% which reflects the growing demand for the group’s automotive LEDs for both fuel and electric powered vehicles.

Setting a solid base for another good year ahead. While the surge of the Omicron variant caught the group off guard, we learnt that the cases had also declined rapidly and are now at a well-controlled level. Production on the floor is back to its optimal level as the group will pick up on backlogs spilled over into 2QFY22. More interestingly, we learnt that the group has managed to maintain a healthy engagement with customers in China despite the lockdowns. As a result, the group saw a strong increase for its LEDs design-in from the region.

Expansion still on track. In anticipation of more orders, the group is working on its automation initiative such as the smart dispensing solution for the encapsulation process in Plant 1 which will be followed by converting those lines into quad-lines via its proprietary double-deck design. Meanwhile, the group is in the process of bringing in equipment for Plant 2 and targets to commence operation by 3QFY22. Plant 2 will be utilised progressively until 2024 where the group will eventually move into its planned Plant 3 in 2025. Construction of Plant 3 is expected to break ground by end-2022.

We maintain our FY22E CNP and FY23E CNP of RM148.1m and RM171.0m, representing 34% and 16% growth, respectively.

Maintain OUTPERFORM with an adjusted Target Price of RM5.40 (previously RM5.60) on bookkeeping purposes to reflect the latest share base. The group has also proposed a renewal of its ESOS program of up to 2% of issued shares for another 10 years. Our valuation is based on 45x FY22E PER at +1SD to its 5-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 - 25 May 2022