Valuation / Recommendation

Results were below expectations, achieving 20.1% and 16.4% of our full year revenue and profit forecasts for FY23F. Revenue for the quarter decreased qoq (-21.4%) and yoy (-13.6%) mainly due to slower sales from the manufacturing and distribution business, and backlogs from the manufacturing segment.

We revise our revenue and earnings estimate for FY23F-FY24F downward by 2.8%-5.4% and 5.8%-8.4% due to lower contributions assumption from the manufacturing business, in line with the slowdown of the overall semiconductor industry. We maintain a BUY recommendation on QES Group Bhd with a lower TP of RM0.70 (down from RM0.81) based on FY24F EPS 3.5 sen and a PE of 20x which is in line with its peer’s average. 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

Solid order book. The company has an order book of RM113m as of Apr 2023 (vs RM113m as of Jan 2023) where RM19m and RM94m is from the manufacturing and distribution segment respectively, which is expected to be fully recognised by FY24.

Factory expansion. The company has completed the renovation of its Hicom- Glenmarie new factory at Shah Alam, with its manufacturing segment running at 95% utilisation rate 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 2H23.

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-50m 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 - 23 May 2023