KEY INVESTMENT HIGHLIGHTS

• 1QFY20 normalised earnings reduced by -1.5%yoy to RM5.6m, which came in below our expectation

• Underutilisation of manufacturing capacity as well as higher operating cost led to contraction in 1QFY20 profit margin

• Nonetheless, 1QFY20 revenue grew to RM118.2m, mainly supported by the Asia and Europe markets

• Covid-19 pandemic to have a more profound effect on the company from 2QFY20 onwards

• Downgrade to Trading Sell with a revised TP of RM0.63

Marginal decline in earnings. D&O Green Technologies Bhd (D&O) 1QFY20 normalised earnings came in at RM5.6m, a slight decline of - 1.5%yoy. This was mainly due to decline in gross profit margin to 25.6% (vs 1QFY19: 27.0%) as well as higher distribution and administrative expenses. Note that the contraction in gross profit margin was attributable to the underutilization of manufacturing capacity during the second half of March 2020. All in, this came below ours and consensus expectation, accounting for 12.3% and 13.0% of full year FY20 earnings estimates respectively.

Not much impact from Covid-19 yet. 1QFY20 revenue expanded by +4.5%yoy to RM118.2m. This was mainly premised on higher revenue from Asia and Europe to RM69.4m (+1.7%yoy) and RM33.1m (+24.0%yoy) respectively. As for the negative effects of the Covid-19 pandemic, it was only felt from second half of March 2020 onwards. Nonetheless, the US market has shown contraction in demand, decreasing by -11.9%yoy to RM12.5m.

Lower R&D spending. The group’s research and development expenses came in -15.2%yoy lower to RM5.0m. This was in view of fewer outsource product reliability testing following a major upgrade of Dominant’s in-house laboratory capabilities.

Impact. We are inputting lower FY20/21/22 earnings estimates of RM32.5/42.1/48.2m respectively as we take into account the disruption in automotive production activities as well as anticipation of lower automotive demand which emanate from the Covid-19 pandemic.

Target price. Post our earnings downgrade, we are reducing our target price to RM0.63 (previously RM0.79). This is premised on pegging FY21 EPS of 2.8sen against unchanged forward PER of 22.6x.

Downgrade to Trading Sell. We are expecting a more profound impact on the Covid-19 pandemic from 2QFY20 onwards. Note that automotive production has been impacted by the temporary plant closure up to May 2020. We view that this would adversely impact the group’s well-being.

Source: MIDF Research - 17 Jun 2020