Valuation / Recommendation

Results were within expectations, achieving 27.2% and 29.9% of our full year revenue and profit forecasts for FY22 due to higher contributions from the distribution segment.

We maintain a BUY recommendation on QES Group Bhd with a revised TP of RM0.650 based on FY23F EPS 3.3 sen and peers average PE of 19.6x. We like the stock due to its attractive growth prospects, strong presence in the Asean region, and stable recurring income.

Investment Highlights

Distribution business recorded an increase in revenue of 33.3% yoy mainly due to an increase in product, materials, spares, and service respectively.

Manufacturing business recorded a 19.2% decrease in revenue yoy due to lower invoice revenue of inspection and handling equipment to semiconductor customers, in addition to supply chain and delivery issues.

The group has an order book of RM110m as of Apr 2022 which is expected to provide earnings visibility for the next 3 to 6 months.

Factory expansion. The company has completed the renovation of its Hicom- Glenmarie new factory at Shah Alam, running at 60% 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.

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 RM71.4m as of 1Q22, in addition to a consistent net cash position since FY20.

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

Source: Mercury Securities Research - 20 May 2022