KEY INVESTMENT HIGHLIGHTS

• Temporary blip in 2QFY20 normalised earnings of RM2.0m due to the impact of Covid19 pandemic locally and globally
• 1HFY20 normalised earnings amounted to RM7.6m (-33.6%yoy) in-line with ours and consensus expectations
• Resumption of strong double digit annual earnings growth from FY21 onwards
• China to remain as the main growth market for the company
• No signs of ICPS conversion from the major shareholders
• Upgrade to BUY with a revised TP of RM1.01

An expected weak quarter. D&O Green Technologies Bhd (D&O) 2QFY20 normalised earnings came in at RM2.0m, a decline of -66.5%yoy. The 2QFY20 financial performance was greatly affected by lower production capacity resulting from the MCO as well as production halts by its customer from Europe, the US and India.

Historically stronger 2H. The temporary blip in 2QFY20 normalised earnings lead to cumulative 1HFY20 normalised earnings of RM7.6m (- 33.6%yoy). Nonetheless, this came in within ours and consensus expectations, accounting for 23.9% and 24.6% of full year FY20 earnings estimates respectively. Note that historically the company’s 2H earnings would usually come in stronger as compared to 1H in view of the seasonal demand.

Capex. The company’s 1HFY20 capex came in at RM18.8m. This represents a decline of -45.1%yoy, premised on the disturbance created by the Covid-19 pandemic. The capex was mainly spent on tools and equipment for new product lines, machinery upgrades, plant automation, QC improvements and construction of new factory.

Impact. We are maintaining our FY20 earnings estimate. However, we are revising upwards FY21 and FY22 earnings upwards by +14.5% and +26.4% respectively to RM48.4m and RM61.1m respectively. Our upward revision is primarily driven by anticipated higher growth from the China and Europe market as well as the higher adoption of smart RGB LED which would garner better margin. In addition, we also remove the conversion of the outstanding 377.1m ICPS from our EPS computation as there is no signs of conversion by the major shareholders in the foreseeable future.

Target price. We are revising our target price to RM1.01 (previously RM0.63). This is premised on pegging FY21 EPS of 4.2sen against forward PER of 24.1x. Our target PER is one standard deviation above the one year historical average PER of 22.7x. We view that the premium is justified, premised on the favourable fundamentals and strong management skills.

Source: MIDF Research - 26 Aug 2020