INVESTMENT HIGHLIGHTS

• Improvement in profit margin raised 4QFY18 normalised earnings to RM13.8m (+50.5%yoy)

• Cumulative FY18 normalised earnings grew by +45.4%yoy to RM38.0m, in-line with our expectations

• Higher FY18 capex of RM29.3m (+46.2%yoy) denotes bright outlook ahead

• Upgrade to BUY with a revised TP of RM0.96 per share

Double digit earnings growth. D&O Green Technologies Bhd’s (D&O) 4QFY18 normalised earnings came in at RM13.8m after excluding the impact on forex (RM1.5m). This represents an increase of +50.5%yoy. The growth in earnings was mainly attributable to improvement in profit margin which is achieved via better sales mix, cost management and efficiency gains.

In-line with expectation. Driven by the earnings growth in 4QFY18, D&O’s full year FY18 normalised earnings came in at RM38.0m (+45.4%yoy). This came in within ours and consensus expectations accounting for 98.4% and 97.7% of full year FY18 earnings estimate.

Capital spending remains elevated. The group incurred higher capex of RM29.3m (+46.2%yoy) in FY18. This was mainly due to new product developments (new headlamp and Smart LED packages) and additional product stress test qualifications to comply with the new LED qualification review (AEC-Q102) requirement and other automotive stress test standards as specified by the customers.

Earnings impact. We are fine-tuning FY19 earnings slightly by -2.0% to better reflect the results thus far. We also introduce FY20 earnings where we expect the group will be able to maintain its annual double digit earnings growth rate.

Target price. We are rolling forward our valuation base year to FY20 and derive a new target price of RM0.96 per share (previously RM0.86). This is premised on FY20 EPS of 3.8sen pegged to unchanged FY19 forward PER of 25.2x. Our conservative target PER is based on the group’s two year historical average low PER.

Upgrade to 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-line with the new automotive models rollout, D&O remains aggressive in its capital spending as seen in its FY18 numbers. All in, we expect FY19 earnings growth to grow by more than +30%. In addition, we are confident that the group would be able to maintain its double-digit earnings growth in the foreseeable term. The current share price also provides a good entry point, in our view, as valuation appears attractive. Also, we view that D&O, given their exposure in the automotive LED market, would provide better earnings quality as compared to other semiconductor companies which has positioned them within the smartphone value chain. All factors considered, we are upgrading our recommendation to BUY from neutral previously.

Source: MIDF Research - 21 Feb 2019