Key takeaways from Supercomnet’s 1Q24 financial result briefing:

Medical Segment to Continue Growing

To recap, the medical segment accounted for 76% of revenue in 1Q24 (vs. 60% in 1Q23) and continues to be the key driver of the group’s revenue. For 2Q24, demand from key customers such as Edward (35% of 1Q24 revenue) and Ambu (37% of 1Q24 revenue) are expected to grow. For Ambu, we expect 2Q24 sales to grow by 10% QoQ driven by the resurgent demand for endoscopy video cables. As for Edward, sales are expected to remain stable in 2Q24.

Meanwhile, maiden contribution from IHS would likely begin in 3Q24. We understand that the issue with the flow controller has been resolved with promising test results approved by FDA and supplier from Italy. As such, the group will undergo performance qualification (PQ) in July, prior to the expected mass production in August/September 2024. In all, we expect IHS to contribute RM13mn to our FY24 revenue.

Delays to Customer N Project

Management shared that the mass production of Nanomedicine Therapy Device (treatment for throat, brain, lung and prostate cancer), using catheter technology has been delayed to next year (previously 3Q24). We gathered that it will take another 6 months to receive the approval as FDA wants to monitor the residual volume (nanoshells) from the clinical trials conducted earlier. Note that FDA doctors have already verified all final 60 clinical trials (100% success rate) in 1Q24.

Automotive: Gradual Recovery Through FY24

The automotive segment contributed a mere 5% of total revenue in 1Q24 as compared to 20% in 1Q23 due to low orders from Stellantis (restructuring production lines). We expect auto segment to remain in a loss-making position (c. RM400k) in 2Q24 due to higher operating cost incurred for setting up its new plant in Gurun, Kedah (located near Stellantis plant). Thereafter, we anticipate gradual recovery through FY24 as Stellantis resume its production. In our projections, we expect sales to recover to RM2mn per month from July onwards. Separately, talks are still ongoing between Supercomnet and Chrysler in relation to the supply wire harness for Chrysler models in the US market.

Forecasts

No Change to FY24-26 Earnings Estimates.

Valuation

Maintain Buy recommendation on Scomnet with a lower TP of RM1.73/share (previously RM1.85) based on 30.0x (previously 32.0x) CY25 EPS due to the delays in Customer N project.

Source: TA Research - 24 May 2024