INVESTMENT HIGHLIGHTS

• 1HFY17 earnings within expectation, making up 44% of full year assumption

• 2QFY17 earnings down 25.5%qoq but is expected to rebound in the next quarter

• Dominant to make Korean unit a wholly-owned subsidiary

• Maintain NEUTRAL recommendation and TP of RM0.66

1HFY17 earnings within expectation. D&O 1H17 net profit of RM8.7m makes up 44% of our full year assumption. We expect sales to recover in 3QFY17 as orders from the China market has normalised compared to 2QFY17.

2QFY17 earnings down 25.5%qoq but is expected to rebound in the next quarter. Lower earnings of RM3.7m in 2QFY17 are largely attributed to sales that declined 14.0%qoq. The lower sales registered this quarter is primarily due to a downstream supply chain adjustment in China, which is temporary.

Earnings for 1HFY17 soared by 75.6%yoy to RM8.7m during the period as D&O phases out its general lighting segment to focus on automotive lighting, which provides more superior profit margin. This is also contributed to sales for the period which jumped 11.0% to RM220.1m as sales from key markets improved. Automotive lighting products now account for more than 95% of D&O’s sales compared to 81.7% a year ago.

Dominant to make Korean unit a wholly-owned subsidiary. D&O’s 61.8%-owned unit Dominant Opto Technologies Sdn Bhd (Dominant) has proposed to buy the remaining 32% it does not already owned in Dominant Opto Technologies Korea Inc (Dominant Korea) for RM7.3m. We believe that D&O can fund the acquisition through internally generated fund as it has a net cash of RM16.9m as of June 30. We are neutral on the acquisition in the near term as Dominant Korea contributes less than 5% to D&O’s PBT now. However, this can be a positive in the long term as Korea becomes an increasingly important automotive market.

Maintain NEUTRAL and TP of RM0.66. We make no changes to our earnings estimates as D&O’s 1HFY17 earnings came within our full year estimation. Our TP of RM0.66 is based on an unchanged PER of 25x pegged on FY18F EPS of 2.6 sen.

Source: MIDF Research - 5 Sept 2017