INVESTMENT HIGHLIGHTS

• Higher sales of automotive LED and improvement in profit margin raised 3QFY18 normalised earnings to RM9.6m

• However, cumulative 9MFY18 normalised earnings failed to kept pace with ours and consensus expectations

• 9MFY18 capex came in at RM41.3m, in-line with management guidance of up to 12% of revenue.

• Declared first interim dividend of 0.5sen per share

• Downgrade to NEUTRAL with a revised TP of RM0.86

Double digit earnings growth. D&O Green Technologies Bhd’s (D&O) 2QFY18 normalised earnings came in at RM9.6m, which represent an increase of +18.6%yoy. The growth in earnings was mainly attributable to increase in automotive LED sales to RM117.5m. This was further boosted by better cost management, production efficiency improvements. Nonetheless, the rise in earnings was partially offset by higher R&D expenses which were attributable to additional product test qualifications for new and existing products.

4QFY18 earnings to trend higher sequentially. Driven by the growth in 3QFY18 normalised earnings, D&O’s 9MFY18 normalised earnings came in at RM24.5m (+40.0%yoy). This is below ours and consensus expectations, accounting for 58.3% and 60.0% of full year FY18 earnings estimates respectively. Nonetheless, we are expecting 4QFY18 earnings to be sequentially higher as compared to 3QFY18 in view of: i) anticipated higher plant utilisation rate, ii) new business wins especially for the exterior automotive lighting applications such as Rear Combo Light (RCL) and; iii) continuous cost and production optimization initiatives.

Sustained capital spending. 9MFY18 capital expenditure (capex) remained elevated at RM41.2m, in comparison with 9MFY17 capex of RM41.6m. This is in-line with management annual capex guidance of up to 12% of revenue. The bulk of the capex was spent on new production equipment, machine upgrades, process automation, new laboratory and QC equipment and renovation costs.

Dividend. The group announced first interim dividend of 0.5sen per share. We are expecting the group to progressively declare higher dividend, given its healthier cash balance.

Source: MIDF Research - 29 Nov 2018