Investment Merits

• Export-oriented business that is set to benefit from a stronger USD against MYR

• Resilient demand for energy-saving products set to support revenue growth

• Ongoing research and development initiatives to develop new products, in order to drive business growth in the long run

Company Profile

IQ Group (IQ) is involved in the designing and manufacturing of a range of passive infrared sensors, motion sensor light controllers, wireless door entry and chimes products, which are mainly distributed in the US, Europe, Japan and South-East Asia.

Highlights

Beneficiary of stronger USD against MYR. IQ is an export-oriented company with >96% of its products being exported to continental Europe, the UK, Japan and the US. As 80% of its exports are denominated in USD, we expect the group to continue to record favourable growth in revenue along with the stronger USD against MYR.

Resilient demand for energy-saving products. We expect IQ to achieve organic growth in sales volume over the years, as demand for energy-saving products remains intact. According to Strategic Energy Technologies Information System’s (SETIS) featured article in Feb 2015, LED: Lighting The Way To An Energy-Efficient Future, it expects stronger penetration of LED lighting products in Europe in the upcoming years, as they are more efficient and durable. We believe this bodes well for IQ, as LED lighting is the largest contributor (39% of FY16 sales) for the group.

Emphasis on ongoing product research and development to drive business growth. Moving forward, we look forward to more meaningful contributions from its new product under the Lumiqs brand, over the next 2-3 years. Lumiqs represents its light-emitting diode (LED) products, which allow the user to save up to 90% of energy costs through intelligent-lighting solutions, whereby the motion sensor technology ensures lighting only illuminates when it is required. As management remains focused on new product development, we believe that contribution from any new products developed would be an added advantage to support business growth in the long run.

Company Report Card

Latest results. Its 9MFY17 net profit of MYR22m was fairly strong, as it came in at 107% of FY17F earnings, surpassing its previous full-year earnings. The robust performance was thanks to the improvement in revenue, stronger USD, and higher sales of products with higher margins.

Balance sheet/cash flow. As at 3QFY17, IQ’s net cash stood at MYR59.3m with no borrowings on hand.

ROE. We expect IQ to achieve ROE of 16.3% in FY17F, supported by earnings growth.

Dividend. A total of 5 sen had been declared as at 9MFY17. For the full year, we expect a 10 sen dividend to be declared.

Management. IQ’s management is founded by Mr Kent Chen WenChin, who is the executive chairman. Mr Daniel John Beasley is the managing director/CEO, and has more than 20 years of experience in the group.

Recommendation

We maintain our BUY recommendation, with an unchanged TP of MYR4.20, based on 15x FY18F P/E. We think that the stock deserves this valuation, premised on the stronger in-house USD/MYR forecast of 4.43, strong balance sheet with increasing cash piles over the years, and rising dividends.

Source: RHB Securities Research - 5 May 2017