KEY INVESTMENT HIGHLIGHTS

• 3QFY19 normalised earnings grew by +61.2%qoq to RM9.5m, supported by the rise in topline contribution

• 9MFY19 normalised earnings of RM21.6m (+4.3%yoy) came in better than our expectation

• The group’s on-going cost management initiatives to keep operating costs in check and defend its profit margin

• Higher dividend of 1.0sen announced for 9MFY19

• Maintain Neutral with a revised TP of RM0.64

Strong recovery in earnings. D&O Green Technologies Bhd (D&O) 3QFY19 normalised earnings came in at RM9.5m, a marginal decline of - 0.8%yoy. However, on a sequential basis, the group recorded a +61.2%yoy recovery in normalised earnings. This was mainly due higher demand of its products along with higher profit margin.

Better than expected. Cumulatively, 9MFY19 normalised earnings amounted to RM21.6m, an increase of +4.3%yoy. This came in above our expectations, accounting for 66.9% of full year FY19 earnings estimates. Historically, the group’s 4Q earnings is the strongest quarter. Coupled with the commercialization of new business wins, we expect 4QFY19 normalised earnings to grow at a faster pace on a sequential basis.

Impact to earnings. We are revising FY19 and FY20 earnings estimates higher by +7.5% and 16.1% to RM34.7m and RM43.5m respectively. Note that we are increasing the revenue contribution in view of new business wins and factoring higher profit margin premised on the group’s on-going cost management initiatives.

Target price. Post our earnings upgrade we are revising our target price to RM0.64 (previously RM0.56). This is premised on pegging revised FY20 EPS of 2.9sen against unchanged forward PER of 22.2x. Our target PER is based on the group’s two year historical average.

Dividend. The group announced second interim of 0.5sen. This led to 9MFY19 dividend of 1.0sen as compared to 0.5sen declared for 9MFY18.

Maintain NEUTRAL. The geo-political tension would inadvertently affect consumer sentiment. This would, in-turn, impact the well-being of the automotive market and subsequently the investment plans of major car companies. Fortunately, the group’s earnings has remains resilient as shown in the latest quarterly earnings. This is partly due to the new business wins which indicates that the group is steadily gaining market share from its peers. Coupled with the on-going cost management strategy, we do not expect any contraction in profit margin. On another note, the dividend yield is anticipated to remain minimal to sustain its expansion plan and meet its R&D initiatives. All factors considered, we are maintaining our NEUTRAL recommendation on the stock.

Source: MIDF Research - 28 Nov 2019