Macquarie Equities Research (MQ Research) initiates coverage on Greatech Technology (GREATEC) with an Outperform rating and target price of RM8.80, 26.4% above its current share price. MQ Research notes that strong electric vehicle (EV) orderbook wins as key catalyst, while estimating GREATEC’s FY20-23E revenue and profit to have a compounded annual growth rate (CAGR) of 40% and 43%, respectively.

One of Malaysia’s key ‘cleantech’ proxies; initiate with Outperform

• A niche automation specialist, with core expertise in customisable capital equipment for solar (First Solar is its main client) and the electric vehicle (EV) sector, GREATEC offers unique exposure to global emerging growth trends, with ~94% of FY21E revenue originating from these ‘cleantech’ industries. With an RM8.80 target price (49x FY22E PER), and +28% implied total shareholding return (TSR), MQ Research initiates coverage with an Outperform recommendation.

Exposed to high-quality, rapidly growing technologies (EV and RE)

• The quality of its exposure to the rapidly growing EV and renewable energy (RE) technologies provides stock exposure unlike other Malaysia semiconductor firms exposed to smart-device cyclicalities. Both industries are seeing meaningful secular trends; MQ Research’s Auto team expects global EVs to see a 25% CAGR in FY21-25E to 30.5mn units, supported by rising production volumes and govts’ policies, while MQ Research’s semiconductor team expects EV semiconductors to see the greatest secular growth within auto semiconductors (US$10.9bn by 2025E, a 35% CAGR). The MQ Research’s Energy team expects global demand for solar to reach 328GW by 2025E (20% volume CAGR), supported by lower solar costs and global commitments to a greener energy mix.

Effective customer acquisition in EV – the next leg of growth

• Given GREATEC’s successful diversification towards EV, MQ Research estimates revenue/profit FY20-23E CAGRs of 40%/43%. Although its 2021 EV contract win is largely priced in (YTD +41% vs KLCI -7%), MQ Research believes the market has not priced in the company’s potential to double its EV customer base, having secured 4 customers in just 1.5 years. By 1H22, MQ Research expects GREATEC to secure recurring orders from Lordstown (key EV customer) and 2 new EV customers (potentially, Atlis Motor Vehicle) worth RM75-100mn each.

• MQ Research forecasts GREATEC’s EV revenue to see a 122% CAGR in FY20-23E vs 10% in solar as more EV clients are secured, building managements credibility. MQ Research forecasts 10-30% higher solar revenue vs management’s initial guidance of RM200-250mn/year from FY21E onwards, as First Solar recently committed to a US$1.3bn investment in facilities in Ohio and India, and doubled its capex guidance last week, which MQ Research believes will benefit GREATEC.

Premium valuations justified by margins and growth

• MQ Research values GREATEC at RM8.80, based on 22E profit (exc. net interest), or a 49x price-to-earnings ratio (+1.5SD). MQ Research thinks the valuation premium is justified, given it is seeing a high-growth phase on customer acquisitions in EV, and MQ Research expects more fund inflows into the RE space to support multiple expansion. GREATEC trades at a 40x FY22E price-earnings ratio (PER), a premium vs regional peers (23x), but boasts sector-leading earnings before interest, taxes, depreciation and amortisation (EBITDA) margins (37% vs peers’ 14%) and returns on equity (ROE) (37% vs peers’ 11%). Downside risks include 1) orderbook sustainability 2) customer concentration risk 3) USD/MYR forex fluctuations. MQ Research’s bear/bull valuations are RM5.60/RM9.90

12-month Target Price Methodology

• GREATEC MK: RM8.80 based on a total shareholder return (TSR) methodology

Source: Macquarie Research - 6 Aug 2021