We remain positive on Supercomnet Technologies Bhd ("Scomnet") on their multi-year growth story on the back of robust demand for its medical cables, new clients and strong pipeline of products. We are raising our earnings estimates by 7% and 20% for FY20 and FY21 respectively. Still a BUY with revised target price of RM2.18 premised on 33x PER FY21 Bursa Malaysia Healthcare Index which is justified for its impressive 5-year net profit CAGR of 45% and Main Board transfer catalyst.

Scomnet's multi-year growth story lies in its trump card being its wholly owned subsidiary Supercomnet Medical Products Sdn Bhd which will anchor its multi-year growth trajectory with increased spending in healthcare globally amidst the Covid-19 pandemic. Scomnet's long standing relationship with key clients namely US based Edwards Lifesciences and Denmark based Ambu. Both are major players in different segments of cardiovascular medical devices space globally where it has been supplying it's European Medical Agency (EMA) and US Food & Drug Administration (FDA) approved components for over 10 years rendering them key partner for long term growth. Its latest product catheter for cardiovascular use has also recently obtained FDA approval and will see it supplying to its newly secured key client Mermaid Medical Group based in Denmark.

Scomnet has earmarked RM7-RM10m for capex to ramp up production to support its key growth driver in the medical products segment while its OEM automotive cables segment which has seen a slowdown in 1H20 is expected to see green shoots in 2H20 and 2021 with Proton and Perodua registering improving sales. Medical segment will remain the main driver for profit and revenue, as evidenced in their 1Q20 results where 87% profit came from medical product segment. Management targets 70% contribution from medical segment and automotive 30%.

Balance sheet remains solid with zero borrowings and growing cash pile of RM50m. Stable margins of 15% is expected to improve to 18% by FY20 and 20% in FY21 anchored by its FDA and EMA certified products with high entry barrier. Scomnet is on track to deliver record earnings with accelerated growth in EPS of 59% in FY20 and 41% in FY21.

Source: RHB Securities Research - 17 Aug 2020