Rakuten Trade Research Reports

D&O Green Tech - Prospects remain intact

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Publish date: Wed, 19 Sep 2018, 09:49 AM
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D&O's prospects remain intact premised on (i) continuous design-win from Tier-1 customers, (ii) strong order visibility on products stickiness, as well as (iii) margin uplift from new products commercialisation. Alongside higher stake in Dominant, the group is on track to achieve a 2-year net profit compound annual growth rate (CAGR) of 64%. BUY with a TP of RM0.850 based on 24.0x FY19E PER (its 3-year forward average PER. 

D&O's profitability is still on the uptrend even after a portfolio transformation which saw Automotive contributing >95% of the total sales. This is backed by the group's better operational efficiency premised on higher vertical integration alongside better product mix. GP margin continued to scale new high, at 27.5% on better product mix against the backdrop of industry-wide adverse currency translations. Sales contribution from Automotive LED remained high at c.94% (vis-a-vis 50% three years ago), with utilisation rate running at an optimal rate of 75% (near to full capacity). 

The group continues to see high strike rate from its design-in with Tier-1 Automotive customers in both interior and exterior lightings. Note that typically when Automotive design-wins were obtained from its Tier-1 customers, the products could last for a good three to five years before it becomes obsolete. For the interior lightings which dominate 70% of sales, the group is already working on its smart RGB (red green blue) LEDs (on system integrated package technology) which would see commercialisation by 2H19. Note that this single product, could see average selling price of at least 3x-4x higher than existing interior LED lightings. 

All in, we expect GP margin to hover at 27-28% even after the assumption of softer USD/MYR of RM4.05/USD compared to the previous year. Its 5-year expansion plan- helmed by a new 2.41 hectare land-cum-factory building (additional 2x of land area, which could house 3x additional capacity) with completion in 1Q19.

Source: Rakuten Research - 19 Sept 2018

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