We recently visited Supercomnet’s plants in Kedah to better understand the group’s prospects and products. Supercomnet is implementing lean manufacturing and automation to improve cost efficiency and replace existing manual processes. We are sanguine on the outlook of Supercomnet due to i) the shift to whole device products, ii) the growing pipeline of new products and iii) the transfer of listing to the main bourse in 2H23. Reiterate Buy with an unchanged target price of RM1.85/share.

Plant Expansion Plans

To recap, the construction of Supercomnet’s second phase of the “2nd-floor expansion plan” (990sqm of operating floor space) has been completed in 4Q22 to cater for new medical products. We gather that US FDA will audit the plant in July, while commissioning will begin in 4Q23. Despite the expansion, the utilisation rate for Supercomnet’s medical segment is expected to remain at 80- 90% in 4Q23.

Meanwhile, the group has recently purchased a factory opposite Supercomnet’s main automotive customer, the Stellantis plant in Gurun, Kedah. As such, Supercomnet will move its automotive segment production in 1H24 to the new factory (total cost of RM15mn, including renovation). This will free up spaces to cater for its medical segment. Supercomnet will also supply wire harness and fuel tank for the upcoming Peugeot 408 crossover. Overall, we expect FY23 revenue from the auto segment to increase by 31.6% to RM20.9mn.

IHS and Mermaid to Boost Medical Sales

Sales to Mermaid are expected to remain stagnant at 540 units per month (USD200 per unit) in 2Q23 and 2H23 due to the stainless steel supply issue. We understand that Mermaid will be the group’s top 3 customers in FY24 if the supply issue can be resolved, as the customer wants about 4k units per month.

As for its new customer, IHS, management reiterated that the supplier’s issue (of not meeting customer/FDA requirement) should be resolved by December for the Intravenous (IV) Controller product. Supercomnet targets to sell 3mn units (USD3-3.5 per unit) of Intravenous (IV) Controller in FY23. Meanwhile, the production of Fixed Rate Tubing, Subcutaneous Needle Set and OneSett™ Subcutaneous Administration Set will begin in 2024. Overall, demand for the IHS project is estimated at 1mn units per month, which will make IHS its top 3 customers moving forward.

Upcoming Products

Management shared that the mass production of Nanomedicine Therapy Device (treatment for brain, throat, lung and prostate cancer) is slated for production in 4Q23/1Q24. Note that FDA approved the product 2 months ago, and the final clinical trial for 60 people will take place in July/August. Meanwhile, the Plass

Rescue Occluder, designed to manage and control heavily bleeding wounds, including those from knife stabs or bullets in 20 seconds, is still pending FDA approval.

Result Preview

Supercomnet will release its 2Q23 results in the 4th week of August. We expect 2Q23 profit to be almost flat at RM7mn-8mn compared to RM7.0mn in 1Q23. This would (1H23) represent 35-38% of our full-year forecast. As Stellantis is facing some raw material issues, we expect a lower contribution from the auto segment in 2Q23, but this will be mitigated by higher sales to Ambu due to the normalised demand for endoscopy.

Forecast & Valuation

No change to our earnings forecasts. Reiterate our Buy recommendation and target price for Supercomnet at RM1.85/share based on 32.0x CY24 diluted EPS. We are confident in the group's growth trajectory due to the maiden contribution from new customers and a robust pipeline of new products.

Source: TA Research - 18 Jul 2023