Kenanga Research & Investment

Oppstar Bhd - Chip Design Services in Short Supply

Publish date: Tue, 30 May 2023, 09:58 AM

OPPSTAR’s FY23 results beat expectations where net profit grew  28%, driven by strong demand for its turnkey IC design as well as  post-silicon validation services, and better cost control. The  demand for customised chips is strong with technology including  AI advancing at breakneck speed. We raise our FY24-25F forecasts by 12% and 16%, respectively, lift our TP by 40% to RM1.82 (from  RM1.30) and upgrade our recommendation to MARKET PERFORM from UNDERPERFORM.

Above expectation. OPPSTAR’s FY23 earnings of RM21.3m (+28%) beat our forecast and consensus estimate by 9% and 6%, respectively.  The variance against our forecast came from stronger deliveries of its turnkey IC design services.

Results’ highlights. YoY, FY23 revenue recorded a growth of 14.5% on the back of higher turnkey design projects secured and recognised during the year. The increase in demand for specific design services and post-silicon validation service further bolstered the company's performance. Notably, the group’s efficient cost control propelled a 28.1% net profit growth (after adjusting for RM0.95m one-off listing expenses), resulting in  a net profit margin increase of 3.9ppts.

Customised chip design services in short supply. The demand for outsourced customised chip design services is strong with technology including AI advancing at breakneck speed. Many companies are actively pursuing AI development to enhance workflow efficiency, making it clear that the market for customised chip design will continue to flourish. Furthermore,  the ongoing chip war between the US and China presents a favourable landscape for companies like OPPSTAR. With a neutral position, the group is well-positioned to capitalise on the situation and seize project opportunities from both parties.

Forecasts. We raise our FY24-25F earnings forecasts by 12% and 16%,  respectively.

Consequently, we raise our TP by 40% to RM1.82 (from RM1.30) based on a higher 30x FY25F PER (previously 25x), in line with the upward trending average forward PER of its global peers (see page 2). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us  (see Page 4).

Investment thesis. We like OPPSTAR for: (i) its foothold and growing presence in the front-end semiconductor space with high entry barriers,  specifically, stringent qualification requirements, (ii) its ability to attract customers from both the East and the West thanks to its access to various foundries and strong design capabilities in leading-edge process nodes, and  (iii) its superior net profit margin of vs peers’ range of 6.4%-19.3%. Upgrade to MARKET PERFORM from UNDERPERFORM.

Risks to our call include: (i) longer-than-expected gestation period for its  regional expansions, (ii) single customer concentration risk with c.68%  group revenue derived from Xiamen KirinCore, (iii) economic downturn  resulting in customers slowing down the development of new ICs.

Source: Kenanga Research - 30 May 2023

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