We continue to favour Supercomnet Technologies Bhd (“Scomnet”) for its resilient earnings outlook and as a proxy to the recession proof healthcare industry. We are raising our earnings estimates by 19.5% for FY21 on the back of rising orders from major clients. BUY with revised target price of RM2.68 premised on a 3-year average mean 34x PER which is at a discount to Bursa Malaysia Healthcare Index of 43x further supported by a 68% growth in EPS for FY21.

Scomnet’s recent 2Q20 results were pretty much in-line with our expectations where it reported net profit of RM5.95m (+45% from previous quarter and +12% from last year) with cumulative RM10m for 1H20.Net margins improved to 24.6% in 2Q20 and cumulative 1H20 to 19% from around 16.0% in FY19. We believe it is on track to surpass our RM30m forecast in FY20 with the medical cable segment being the key driver with resilient outlook and impressive pipeline of products to sustain its earnings going forward. Furthermore, their automotive segment is seeing a recovery post MCO and has landed a new major client in French PSA Group.

Scomnet is embarking on a multi-year expansion with initial capex of RM7-10m and eventually is expected to double production capacity catering for their supercharged growth in the medical products supplying their FDA and EMA approved medical cables to their long serving major key clients namely US based Edward Lifesciences and Denmark based Ambu and Mermaid Medical. These companies are major global cardiovascular medical devices companies anchoring Scomnet growth trajectory as cardiovascular diseases are the number no. 1 cause of death globally according to WHO.

Balance sheet remains healthy with cash pile growing to RM56.6m and zero borrowings. We expect Scomnet to deliver its strongest ever performance on record with supercharged growth in EPS of +59% in FY20 and +68.3% in FY21.

Source: Rakuten Research - 7 Sept 2020