INVESTMENT HIGHLIGHTS

• Resilient 1QFY19 revenue performance despite lower overall car sales

• Higher 1QFY19 capex of RM15.9m (+116.1%yoy) denotes bright outlook ahead

• Ascribing lower valuation due to negative repercussion caused by heightened spat between the US and China

• Maintain BUY with a revised TP of RM0.80 per share

Resilient revenue performance. D&O Green Technologies Bhd’s (D&O) 1QFY19 normalised earnings came in at RM5.7m. Despite lower overall car sales from the group’s main market, 1QFY19 revenue remained stable at RM113.1m. This suggests that the group is gaining market share from its competitors. Note that new light and passenger car sales in China fell by -13.2%yoy, while the European Union and the USA registered negative growth of -3.2%yoy and -2.0%yoy respectively during the period.

Slightly below expectation. Although D&O’s 1QFY19 earnings only constitutes 11.5% (1QFY18: 13%) of our full year FY19 earnings estimates, we deem the result to be slightly below our expectation. Note that seasonally 1Q earnings are usually the weakest.

Capital spending increase further. The group incurred higher capex of RM15.9m (+116.1%yoy) in FY19. This was mainly due to: i) purchase of tools and equipment for new production lines, ii) upgrades of existing machinery and equipment, iii) plant automation, iv) improvements on quality control processes and v) renovation of the new factory.

Impact on earnings. The on-going trade between the US and China has led to uncertainty and thus subdued consumer sentiment. This has lead to reduction in overall car sales. In view of this, we are assuming a more conservative revenue growth for both FY19 and FY20. As a result, our FY19 and FY20 earnings estimates have been revised lower to RM46.4m and RM55.5m respectively. Post our earnings adjustments, we are still expecting the group to record double digit earnings growth for both FY19 and FY20.

Source: MIDF Research - 24 May 2019