1HFY22 CNP came in largely within expectation. Revenue climbed 16.7% YoY on resilient orders for automotive LED products while CNP grew at a commendable rate of 15.4% despite the increase in minimum wage in May 2022. We expect a stronger 2HFY22 on the back of robust orders coupled with the commissioning of Plant 2 in 4QFY22. Maintain OUTPERFORM with an unchanged TP of RM4.50.

Within expectations. 1HFY22 CNP came in at only 42% and 41% of our and consensus full-year estimates, respectively. However, we consider the results within expectations as we expect a stronger 2H on the back of robust orders coupled with the commissioning of its Plant 2 in 4QFY22.

Results’ highlight. YoY, 1HFY22 revenue climbed 16.7% on higher demand for the group’s automotive LED products. D&O’s resilient sales figure illustrates that the weak global vehicle shipment during the reporting quarter is more likely due to the on-going chip shortage, rather than waning consumer demand. As a result, 1HFY22 CNP (after adjusting for unrealised foreign exchange losses) grew 15.4% which is commendable given the increase in minimum wage which was implemented in May 2022.

A stronger 2H. Moving into 2HFY22, the group remains sanguine on its order pipeline where visibility is now up to November. We are optimistic for D&O to deliver a stronger set of numbers in 2HFY22 as demand for automotive LEDs remains robust. The group is in the midst of renovating a portion of Plant 2 and targets to commence operation by 4QFY22. Note that the occupancy of Plant 2 will be minimal in FY22 and will gradually increase until 2024. In addition, the group has initiated the necessary application for Plant 3 with the construction to follow in 2023.

Forecasts. Maintained

We keep our OUTPERFORM call with an unchanged Target Price of RM4.50 based on 25x FY24F (CNP RM222.5m) PER, in line with peers’ forward average. There is no adjustment to TP based on its 3-star ESG rating as appraised by us (see Page 4).

Risks to our call include: (i) disruption of components supply, (ii) replacement/obsolescence of LED technology, (iii) sharp decline in automotive demand.

Source: Kenanga Research - 24 Aug 2022