• MYR0.88 FV pegged to 25x FY25F P/E, at 20% discount to peer average. The current below-peer valuation of 18x FY25F P/E (ex-cash P/E 15.7x) vis-à-vis a 2-year CAGR of 31% is undemanding for a growing semiconductor production equipment (SPE) player that has exposure to the front-end equipment. Demand-led recovery, diverse clientele, strong regional presence and healthy orderbook should drive QES Group’s earnings recovery and growth in FY24F- 25F, capturing opportunities in the new semiconductor upcycle.

• Beneficiary of the semiconductor sector recovery. The semiconductor sector is poised for a recovery, with 2024 and 2025 growth forecasts of 16% and 12.5% (World Semiconductor Trade Statistics (WSTS)). SEMI also recently revised its projections upward, anticipating a recovery in sales for front-end, back-end, and assembly and packaging equipment in FY24, with all sub- segments expected to accelerate further in 2025. This growth will be driven by the anticipated rebound in demand across automotive, industrial, and consumer electronics markets. Local automated test equipment (ATE)/SPE players are also likely to benefit from the ongoing US-China trade tensions, positioning themselves as strategic alternative suppliers amid export restrictions. This shift should enhance their role in the industry's resurgence. Moreover, the National Semiconductor Strategy (NSS) will play a crucial role in driving the long-term growth of Malaysia's semiconductor industry.

• Growing front-end equipment and manufacturing portfolio. QES’ manufacturing division has shown a remarkable 2019-2023 CAGR of 46.5%. In fact, the group has focused on enhancing its manufacturing capabilities and moving up the value chain, and is now equipped to produce front-end equipment such as wafer stockers/sorters, wafer measurement systems, and post-probing vision inspection systems. Front-end wafer fab customers contributed 17% of its FY23 revenue and is targeted to reach 20%. With outstanding orders of MYR24m as at end-June and several large orders from wafer fabrication customers, this higher-margin division is expected to drive earnings growth. These will be further boosted by its JV with US-based Applied Engineering to expand into high-technology semiconductor equipment manufacturing at the new plant in Batu Kawan, Penang.

• Robust orderbook, diversified and recurring customer base. The distribution division recorded a 3-year revenue CAGR of 13.8% and contributed c.86.1% of group revenue in FY22. This division provides a stable and recurring income base, acting as a counter-cyclical factor against fluctuations in the semiconductor market. Supported by a robust sales network that caters to diverse industries, including E&E, mining, and pharmaceuticals, QES is well- positioned for continued growth. With total outstanding orders of MYR102m as at end-June (0.4x cover), the group is expected to see a further uptrend in orders amid the recovery of the E&E industry.

• Key risks: Order fluctuations, labour shortages, escalation of input costs, technology obsolescence and depreciation of USD against the MYR.

Source: RHB Research - 16 Aug 2024