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FV of MYR0.62, based on 18x FY23F P/E. We expect QES Group to chart a new record high in earnings this year, forming a base for its solid growth path (3-year CAGR: 22.7%), supported by a healthy book-to-bill ratio, sustainable recurring income, a growing manufacturing portfolio, improved orders and delivery. It is trading at a very undemanding 13x FY23F P/E (vs the 26x peer average), on the back of growing manufacturing capabilities in serving various industries.
Strong order flows remain. Despite the seeming slowdown of the semiconductor sector, there are opportunities from various sub-segments such as automotive integrated circuits (ICs), power devices, as well as demand from China. The distribution unit that serves various industries from mining, pharmaceutical, petrochemical to E&E will continue to form a stable earnings base and grow steadily, given its wide distribution network across ASEAN and its outstanding orderbook of MYR127m. Meanwhile, the group’s growing manufacturing portfolio (21% of orderbook value), will be the main driver for the upsurge in profitability.
Growth from the manufacturing portfolio. While QES’ manufacturing unit contributed c.11% and c. 9% of FY21 group revenue and profit before tax, the next growth engine lies in this higher-margin division, as the order intake from its customers (eg automotive players) continues to remain healthy – this includes vision inspection equipment, wafer measuring systems and automated handling equipment. Also, its recent JV with Applied Engineering should allow the group to expand into high-technology semiconductor equipment making in Penang. The ongoing capacity expansion (+100k sq ft) should enable QES to further improve its operating efficiency and expand its solution offerings to include smart manufacturing.
An established distributor for reputable brands. QES established itself as a 1-stop specialist in manufacturing, distribution and services of test, inspection and measuring equipment. From Nikon and Rigaku to Spectro, the diversity of brands it carries allows it to provide a comprehensive range of quality products to customers – which enables QES to be a preferred equipment distributor that is able to fulfil different customer needs. Also, a dedicated after-sales support service team and a wide network of sales channel partners have helped QES to serve over 3,800 customers, with 13,000 units of equipment sold throughout the world.
Our FV of MYR0.62 is based on a target P/E of 18x (c.30% discount to the peer average) on FY23F earnings, supported by a 3-year CAGR of 22.7%. This, in turn, is on the back of strong orderbook, buoyed by the healthy structural growth trend, sustainable recurring income, diversified market segments and regional presence in the ASEAN countries. In addition, the process to transfer its listing status to the Main Market from ACE Market could act as a re-rating catalyst if institutional investors accumulate its shares. Key risks: Order fluctuations, labour shortages, and escalation of input costs.
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....