KEY INVESTMENT HIGHLIGHTS

• Higher distribution and administrative expenses led to - 18.0%yoy decline in 4QFY19 normalised earnings

• Full year FY19 normalised earnings contracted by -5.7%yoy to RM33.0m, in-line with ours and consensus expectations

• Topline contribution supported by commercialisation of new business wins

• Slowdown in demand from the consumer electronic segment to persist

• Maintain Neutral with a revised TP of RM0.79

Contraction in profit margin. D&O Green Technologies Bhd (D&O) 4QFY19 normalised earnings came in at RM11.4m, a decline of - 18.0%yoy. This was mainly due to higher distribution and administrative expenses. However, the decline in earnings was partially cushioned by higher revenue of RM150.5m (+7.0%yoy) due to increasing customer penetration.

In-line with expectations. Cumulatively, full year FY19 normalised earnings amounted to RM33.0m which translates into a reduction of - 5.7%yoy. This was mainly attributable to the decline in profit margin to 6.5% (vs Fy18: 7.8%). Nonetheless, the lower profit margin was partially offset by the slight expansion in FY19 revenue to RM504.3m. All in, the group’s FY19 financial performance came in within ours and consensus expectations, accounting for 95.0% and 97.8% of full year FY19 earnings estimates.

Bigger market share. FY19 revenue recorded a growth of +2.8%yoy to RM504.3m. This was premised on increased LED demand from the commercialisation of new business wins for the automotive segment. However, the non-automotive segment reduced by -40.5%yoy due to slower demand form the consumer electronics sector.

Impact. Premised on FY19 financial performance, we fine tune FY20 and FY21 earnings estimates to RM45.5m and RM52.5m respectively.

Target price. We are rolling forward our valuation base year to FY21 and derive a new target price of RM0.79 (previously RM0.64). This is premised on pegging FY21 EPS of 3.5sen against forward PER of 22.6x. Our target PER is the group’s one standard deviation above the two year historical average.

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 expect profit margin to remain resilient. 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 - 27 Feb 2020