Valuation / Recommendation

Results were within expectations, achieving 49.0% and 52.6% of our full year revenue and profit forecasts for FY22. Revenue for the quarter decreased qoq (-19.9%) and yoy (-2.2%) mainly due to lower sales from the distribution business.

We maintain a BUY recommendation on QES Group Bhd with a revised TP of RM0.63 based on FY23F EPS 3.2 sen and peers average PE of 19.8x. We like the stock due to its attractive growth prospects, well-positioned to leverage on the growing semiconductor industry which is forecasted by IDC to grow at a 5- year CAGR of 4.93% from 2021 to 2026.

Investment Highlights

Distribution business recorded a decrease in revenue mainly due to lower deliveries of equipment in the current quarter. Lower contributions from the distribution business were partially offset by higher revenue from the manufacturing business due to higher sales of inspection and handling equipment to semiconductor customers.

Solid order book. The company has an order book of RM122m as of July 2022 (vs RM110m as of Apr 2022) where RM27m and RM95m is from the manufacturing and distribution segment respectively, which is expected to provide earnings visibility for the next 6 to 9 months.

Factory expansion. The company has completed the renovation of its Hicom- Glenmarie new factory at Shah Alam, with its manufacturing segment running at 90% utilisation rate. We expect the factory to be fully utilised by end of FY22 with the hiring of new workers. 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 a 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 end of 2H22.

With the expansion of the manufacturing segment, we think that the company is able to diversify its geographic revenue stream apart from the ASEAN region, well-positioned to leverage on the growing semiconductor industry.

Stable recurring income. QES has a consistent annual recurring income of approximately RM40m via the maintenance and service of large equipment installed base which contributes approximately 25% to the group revenue.

Risk factors. (1.) Material supply chain disruption (2.) Labour shortages.

Source: Mercury Securities Research - 24 Aug 2022