D&O’s 1QFY24 results met expectations. It reported a decent 1QFY24 net profit of RM11.3m (vs. merely breaking-even a year ago) driven by improved orders for its bread-and-butter automotive LEDs. Rising 1Q2024 car sales in China (+10.7% YoY) and Europe (+4.4% YoY) augurs well for D&O. We keep our forecasts, TP of RM3.60 and MARKET PERFORM call.

D&O’s 1QFY24 net profit of RM11.3m (vs RM0.9m in 1QFY23) accounted for 11% and 10% of our and consensus full-year estimate, respectively. However, we deem the results within expectations as 1Q is D&O’s seasonally weakest quarter.

YoY, D&O's 1QFY24 revenue rose 27.5% on higher orders for its automotive LEDs. This was on the back of a 10.7% YoY increase in China’s car sales during 1QCY24 according to reports from China Association of Automobile Manufacturers while the European Automobile Manufacturers' Association recorded a 4.4% increase in car sales during the same period. It reported a decent 1QFY24 net profit of RM11.3m (vs. merely breaking-even a year ago) on gain of operating scale on higher utilisation and streamlining of cost.

QoQ, its 1QFY24 revenue dipped 11.7% while net profit fell 53.6% as 1Q is the group’s weakest quarter. This is mainly due to a shorter operating period resulting from the Chinese New Year holidays and a low season for car purchases.

Outlook. The group believes inventory correction is nearing its end, paving the way for restocking by car producers. The monumental adoption of EVs in China augurs well for the demand for LEDs.

Forecasts. Maintained

Valuations. We also keep our TP of RM3.60 based on an unchanged FY25F PER of 30x, in line with peers’ forward average. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We like D&O’s for: (i) its presence in the high-growth automotive LED space, (ii) its penetration into the electric vehicle market, and (iii) its ventures into next-generation smart LEDs that fetch high margins. While its earnings have bottomed out, driven by a gradual return of orders from China, we believe that its share price has fairly reflected its fundamentals. Maintain MARKET PERFORM.

Risks to our call include: (i) a weaker-than-expected recovery in the global economy, especially in China, (ii) the inventory adjustment cycle prolonged longer than expected, and (iii) contributions from its smart LEDs being delayed due to slow adoption.

Source: Kenanga Research - 28 May 2024