Valuation / Recommendation

We recommend a BUY on QES with a TP of RM0.660 based on FY23F EPS 3.3 sen and peers average PE of 20.0x. We like the stock for its attractive growth prospects, strong presence in the Asean region, and stable recurring income.

Investment Highlights

Factory expansion. The company has completed the renovation of its Hicom- Glenmarie new factory at Shah Alam, running at 50% utilisation rate. We expect the factory to be fully utilised by end of FY22. The new factory has an overall space of 81,000 sq ft, an increase from 39,000 sq ft, where 35,000 sq ft is allocated for manufacturing. With the increased space, the company is able to increase its capacity from 50-80 machines to approximately 80-100 machines a year.

The company is also building another new factory in Batu Kawan, Penang to leverage on the existing matured supply chain within Penang. The factory will have a manufacturing space of approximately 100,000 sq ft to house a combined QES Mechatronics, QES Vision, AETM (JV between Applied Engineering Inc, USA (70%) and QES Group (30%)), and QES Distribution Penang operations. Construction of the factory is expected to begin from 2H22 onwards.

Strong presence in the ASEAN market. QES has a diversified base of more than 3,800 customers across the ASEAN region primarily from the semiconductor, E&E, Metal and Automotive sectors. The company’s revenue stream is also well-diversified where each customer does not contribute more than 10% of total revenue. Moving forward, the company plans to expand its regional presence in China via QES Hong Kong.

Stable recurring income and strong financial position. The company has a consistent annual recurring income of approximately RM40m via the maintenance and service of large equipment installed base which contributes approximately 25% to group revenue. Cash balance remain strong above RM79.4m as of 31-Dec 2021, consistent net cash since FY20.

Experienced management team. The Group is currently managed by MD Chew Ne Weng who has more than 30 years of experience in the engineering industry and is responsible for the Group’s success. The company has a long- standing management team with more than 10 years of experience in key operational and technical functions.

Risk factor. Key risks include material supply chain disruption, and slower- than-expected contract flows.

Source: Mercury Securities Research - 22 Jul 2021