INVESTMENT HIGHLIGHTS

• Higher sales of automotive LED and improvement in profit margin raised 2QFY18 normalised earnings by +78.7%yoy

• 1HFY18 normalised earnings within our expectation

• Higher plant utilisation rate and new business win for the exterior automotive LED to boost 2HFY18 earnings

• Capital spending expected to accelerate further in 2HFY18

• Maintain BUY with an unchanged target price of RM0.88

Impressive earnings growth. D&O Green Technologies Bhd’s (D&O) 2QFY18 normalised earnings came in at RM7.4m, representing an impressive increase of +78.7%yoy. The growth in earnings was mainly attributable to increase in sales from both the automotive (+10.6%yoy) and non-automotive segments (+25.1%yoy). There were also better cost management and improvement in production efficiency which led to expansion in profit margin of 6.5% as compared 4.1% achieved in 2QFY17. Note that sales from the Asia region remain flat in view of inventory adjustment which commenced after Chinese new year.

Earnings kept pace with expectation. Driven by the surge in 2QFY18 normalised earnings, D&O 1HFY18 normalised earnings came in at RM14.6m (+52.9%yoy). This accounts for 34.8% and 35.4% of ours and consensus’ full year FY18 earnings estimates respectively. Nonetheless, D&O’s 1HFY18 financial performance came in within ours expectation. This is premised mainly on: i) expected higher 2HFY18 plant utilization rate of 80% (vs 1HFY18: 65%), ii) commercialisation of new business wins especially for the exterior automotive lighting applications such as Rear Combo Light (RCL) and; iii) continuous cost and production optimization initiatives.

Allocating higher capital expenditure (capex) for 2HFY18.

1HFY18 capex of RM16.3m was mainly spent on equipment purchase for new products, capacity expansion, machine upgrade, plant automation and quality control processes. For 2HFY18, management guided that capex will accelerate to RM38m. The additional capex is to mainly cater for the renovation of the new building (approx. RM10m) and laboratory expansion to strengthen Dominant’s in-house test capabilities (approx. RM5m).

Target Price. We are maintaining our target price of RM0.88 per share. This is premised on FY19 EPS of 3.5sen pegged to unchanged FY19 forward PER of 25.2x. Our target PER is based on the group’s two year historical average low PER.

Maintain BUY. The shift in focus to automotive LED lighting has greatly improved the group’s earnings growth prospect in recent years. Premised on new automotive model rollout and advancement in the production knowhow, we expect the group would be able to consistently expand its profit margin and thus, earnings. In the immediate term, the demand of exterior automotive LED would pick up at a higher pace as compared to interior automotive LED. On a longer term horizon, the group’s earnings growth would stem from the increase in adoption of ambient lighting in conjunction with the higher acceptance for autonomous car. The expectation of progressive increase in dividend payment, in view of better financial position, would further elevate the stock attractiveness. All factors considered, we are maintaining our BUY recommendation on the stock.

Source: MIDF Research - 23 Aug 2018