INVESTMENT HIGHLIGHTS

• 1HFY19 normalised earnings of RM11.4m came in below ours and consensus expectations

• Anticipating a challenging 2HFY19 as global car sales volume continues to decline

• Expansion plan on new factory remains on track to support future growth

• Downgrade to NEUTRAL with a revised target price of RM0.56 due to lack of growth catalyst

2QFY19 earnings holding up. D&O Green Technologies Bhd’s (D&O) 2QFY19 normalised earnings came in at RM5.9m, an increase of +28.6%yoy. This was mainly attributable to lower effective tax rate of 17.6% (vs 2QFY18: 22.6%) in view of capital allowances and reinvestment allowances. Note that in 2QFY18, the group’s reported earnings was partially boosted by the inclusion of gain on litigation settlement amounting to RM3.1m.

Below expectations. Cumulatively, D&O’s 1HFY19 financial performance amounted to RM11.4m (+1.0%yoy). Nonetheless, the group’s 1HFY19 financial performance came in below ours and consensus expectations, accounting for 24.6% and 26.7% of full year FY19 earnings estimates. Historically, earnings for first half of the year usually accounted for approximately 40% of full year earnings.

Impact to earnings. We are reducing FY19 and FY20 earnings estimates to RM32.3m and RM37.5m respectively. We are still expecting 2HFY19 earnings to come in higher than as compared to 1HFY19 earnings, in-line with the seasonal trend. However, on a yearover-year basis, we view that there will be added downward pressure in earnings due to the rising geopolitical tension which has further weakened the consumer sentiment.

Target price. Post our earnings revision, we are revising our target price to RM0.56 (previously RM0.80). This is premised on pegging revised FY20 EPS of 2.5sen against forward PER of 22.2x. Our target price PER is based on the group’s two year historical average PER.

Expansion plan remains on track. Despite the short term market weakness and uncertainty, the group remains steadfast on its expansion plan. To recall, renovation of the new factory is on schedule. The supporting office function is expected to move into the new building towards the end of 2019 to make way for more production floor space at the existing factory. In addition, the group remains focused on developing innovative products for the future and expanding its product offering to capture a wider range of applications.

Downgrade to NEUTRAL. We are comforted by the improvement in the group’s market position. However, the overall automotive market remains weak in view of the rising geo-political tension. This will lead to higher unutilised production capacity which could negatively impact the group’s operating profit margin. Nonetheless, we believe that the group’s cost management strategy could partially buffer the downward pressure in profit margin. On another note, we view that the group may be conservative in its dividend payout to sustain its expansion plan and meet its R&D initiative. All factors considered, we are downgrading our recommendation to NEUTRAL from buy previously.

Source: MIDF Research - 22 Aug 2019