Medical Segment to Remain the Key Driver

We forecast Supercomal Medical Products’ (SMP) FY23 revenue to grow by  25.6% to RM123.1mn from RM98.0mn in FY22 driven by: (1) commercial production of new products and (2) products previously affected by Covid-19 restrictions back in production. In addition, the newse products (whole devices)  would yield better margins and are expected to take up majority of the Phase 2 of second floor expansion of additional 990-sqm of floor space.

As for product updates, the production setup for the non-electric syringe infusion system (with adjustable flow rate controller) is ready, pending raw material quality issue from a FDA-approved supplier. We gather that there have  been progressive improvements. More importantly, Scomnet has found an alternative supplier in Malaysia and is confident that the raw material quality issue will be resolved by June-23. If successful, management expect IHS contribution to account for 10% of its FY23 revenue. Meanwhile, management shared that the group will deliver 540 units per month of the D*Clot HD to  Mermaid till August-23. Besides that, we understand that Ambu has started to reorder its gastroscope products with small quantities after four months of project half while contribution from Edward will continue to grow in FY23.

Robust Automotive Segment

We are confident that Scomnet’s automotive segment revenue will improve by  83% to RM29.1mn in FY23, boosted by orders from Stellantis. Net margin for the automotive segment are expected to hover at around 12-16%. We gather that the mass production of fuel tanks has commenced in Feb-23 while production of wire harness will begin in April-23 (test-runs are already ongoing).

Expecting 1Q23 to be Flattish

To recap, 4Q22 profit dipped to RM6.1mn from RM10.1mn in 3Q22 due to inventory adjustment from Ambu, lower demand for Endoscopy Video Cable  (used in Covid treatment) and lower orders from Stellantis. Positively,  Scomnet’s FY22 net profit surged 30.9% to RM33.0mn on the back of higher sales from existing customers as well as maiden contributions from new customers. YTD, FY22 dividend stood at 0.5sen per share and we expect the group to pay a final dividend of 1.5sen per share.

Going inton1Q23, we expect Scomnet to post a flattish QoQ result of RM6.0- 8.0mn. All in all, we project FY23 earnings to grow by 22.9% to RM40.6mn driven mostly by the medical and automotive segment. With regards to the transfer of listing to the Main Market, we understand that major outstanding items that caused the delay in transfer application have been resolved. As such,  the group are in the midst of finalising the documents to SC by next month  (previously 4Q22).

Forecast

We trim our FY23/24 earnings estimates by 11.5/12.6% after reducing sales assumption by 9.2/10.0% (factored in lower contribution from Mermaid and  IHS).

Valuation

We roll-forward our valuation year and raise our target price to RM1.86/share (from RM1.71 share) based on a target PE of 32.0x CY24 diluted EPS. Maintain  Buy on the stock.

Source: TA Research - 24 Feb 2023