Post Supercomnet’s 1Q23 result, we maintain our earnings forecast and Buy recommendation with an unchanged TP at RM1.85/share. Moving into 2Q23, management guided for a gradual recovery in earnings on the back of higher medical sales. We remain optimistic on the group’s prospects due to healthy order book from key customers and commercial production of new products/new customers. In the meantime, the group is focused on cost efficiency and strengthening its product margins with the shift to whole device products.

Review of 1Q23

To recap, Supercomnet’s 1Q23 revenue rose 3.9% to RM37.4mn, primarily driven by: i) increase in automotive revenue (20% of revenue vs. 8% in 1Q22), ii) drop in medical segment revenue due to post Covid inventory adjustment and iii) decrease in demand for endoscopy video cables used for Covid treatments. Corresponding with lower contribution from the medical segment, and coupled with higher electricity tariffs and implementation of Minimum Wages Order 2022, Supercomnet’s1Q23 net profit and net margin declined to RM7.0mn (-5.2% YoY) and 18.8% (-1.8pp YoY).

Medical Segment Guided to Pick Up

Moving into 2Q23, management has guided for a recovery in revenue from the medical segment, driven by 15% increase in sales to Ambu (17% of 1Q23 revenue) due to normalise demand of endoscopy (140k units per month currently compared to 200k units per month during Covid period). Meanwhile, the sales to Edward Lifesciences (36% of 1Q23 revenue) will remain resilient, with 3 new products (2 receptacle connector and 1 swan cable) this year and 20 new products in the pipeline for the next 1-3 years. However, sales to Mermaid are expected to remain stagnant at 540 units per month in 2Q23 and 2H23 due to the stainless steel supply issue.

Recent developments on the material issue (suppliers cannot meet customer/FDA requirement) by 4Q23/1Q24 for Fixed Rate Tubing and Intravenous Controller product to its new customer, Innovative Health Sciences (IHS) would also provide comfort to the growth of Supercomnet’s medical segment. The group targets to ramp up production to 1mn units per month by 2H24 with an ASP of USD3 per unit. Meanwhile, the mass production for Nanomedicine therapy device (cancer treatment) for customer N is slated for 4Q23.

Automotive Segment will still be Growing

We understand that revenue contribution for the auto segment will reduce to 8-15% in 2Q23 and 3Q23 (vs. 20% in 1Q23) as Stellantis is facing some raw material issues. As such, orders from Stellantis will reduce to about 200-300 sets (hire harness and fuel tank) in 2Q23 and 3Q23 from 300-400 sets in 1Q23. Note that the mass production of fuel tank began on Feb-23 for 1st model while the mass production of wire harness started in June-23 (deliveries from September onwards). Overall, we expect FY23 revenue from the auto segment to grow by 31.6% to RM20.9mnas compared to RM15.9mn in FY22. Meanwhile, net margin for the auto segment is expected to hover at around 12-18%.

Forecast

No change to our FY23-25 earnings projections.

Valuation

We maintain our Buy recommendation and target price for Supercomnet at RM1.85/share based on 32.0x CY24 diluted EPS. We continue to like Supercomnet for its robust pipeline of new products backed by decades-long partnerships with Tier-1 customers, solid order book for next 1-2 years, expansion plans and robust balance sheet (net cash of RM153.5mn).

Source: TA Research - 16 Jun 2023