Investment Merits

• Orders for medical devices remain strong despite a temporary  hiccup in production

• Wire harness and fuel tank orders may expand for new car models

• Solid balance sheet to support acquisition opportunities

• Transfer of listing to Main Board in final stage

Company Profile

Supercomnet has three major business segments – medical,  automotive cables, and industrial wiring and cables. The medical  segment is the largest revenue contributor – c.64% last year. The  company manufactures medical devices and special tubing for delivery  systems. The automotive cables contributed c.6% of FY22 revenue.  The division started supplying fuel tanks and wire harnesses to Peugeot  from 2H22. The industrial wiring and cable segment makes up the  remaining 30% of revenue. This segment includes wires and cables for  automotive, safety sensor products, electrical appliances, and other  general usages

Highlights

Growth in medical device segment to resume in 2H23. Despite the  temporary hiccup in demand and production late last year, we believe  the growth for the medical segment will gear up again in 2H23. The loss  in volume for endoscopy video cables for Ambu A/S is compensated by  a new order of medical tubes (Vivasight) from March, as well as  gastroscopes and colonoscopes, which will be delivered beginning mid-2023. Meanwhile, the company will also continue delivering 540 units of  declotting devices to MerMaid Medical until August after securing  enough stainless steel components for production (the manufacture  was halted temporarily due to raw material supply issue). As for the IHS  Syringe Infusion System – initially scheduled to start production in 3Q22  – management expects to kick off by June as the company is now  sorting out quality issues with the raw material supplier.

Wire harness and fuel tank orders expanding to newer car models.  The automotive segment should be the key growth driver in 1H23, given  the new orders from Stellantis. We understand mass production of fuel  tanks began in 1Q23, with the number expected to rise from 360 units  per month now to 500 in the next few months. The production of fuel  tanks and wire harnesses for another vehicle model is in the pipeline.

Solid balance sheet to support acquisition opportunities. The  company is in a net cash position with MYR163m in available funds.  Although management has yet to acquire a target company  successfully, it has been evaluating a number of potential candidates over the past one year. Provided the valuations are reasonable, we  believe the potential acquisition will likely accelerate the company’s  earnings growth, on top of its existing organic growth.

Transfer to Main Board to boost investability. The company’s listing  switch to the Main Market from ACE Market should take place in mid2023, following numerous documentation issue delays. Despite the  hold-up, we believe the stock will be more investable when it is listed on  the Main Market, while its growth momentum will pick up further in the  coming quarters.

Company Report Card

Results highlight. The medical segment experienced slowdown in  4Q22, largely because of the quality of raw material supply – delaying  IHS Syringe Infusion System production. Other factors for the slowdown  include Ambu’s pullback in demand due to inventory adjustment and  reduction in order volume for the endoscopy video cable used in  COVID-19 treatment. The implementation of the Minimum Wages Order  2022 also affected bottomline during the quarter.

In net cash position. Supercomnet currently has zero debt, with  MYR36m in cash and term deposits as well as MYR127m in financial  assets. The company paid for its expansion entirely with internal funds.

Dividends. Supercomnet does not have a fixed dividend policy. The  company has consistently paid out 40-50% of its earnings as dividend.  Last year, it declared a 2 sen dividend (vs 1.5 sen in FY21),  representing a 46% payout ratio

Management. Lim Eng Chuan is the company’s executive director.  During his 22 years tenure, he has held various positions in  Supercomnet – R&D, sales and marketing, overall development, and  implementation & review of quality management system.

Investment Case

We continue to like the stock for its niche exposure as a medical and  automotive components supplier. We believe demand for healthcare  products and services will remain strong, while technology  breakthroughs and product inventions will lead Supercomnet’s growth  over the medium term.

2H23 earnings will likely play catch-up until the medical division’s raw  material issues are resolved. We estimate a net profit growth of 16% for  FY23

There is no comparable peer for Supercomnet. Given the stock’s  historical PE range of 27-38x over the past one year (average 32.5x),  we derive a fair value range of MYR1.63-1.75, based on 28x and 30x  PE of our estimated FY23 earnings. We are of the view that the recent  share price correction represents a good opportunity to accumulate.  Note that Supercomnet’s 5-year historical PE is rather volatile, with a  range of 11-75x.

Key risks include further increases of raw material price, possible delay  in US Food and Drug Administration approvals and hence  commencement of production, unexpected termination of contracts, and  high reliance on a limited number of customers.

Source: RHB Securities Research - 16 May 2023