• Maintain BUY, higher MYR13.22 TP from MYR12.44, 18% upside plus 2.9% yield. 1HFY20 results were within expectations. Despite a slight dip in revenue amidst weak market conditions, better cost savings initiatives coupled with lower financing and tax expenses saw core profit coming in flat YoY. New TP of MYR13.22 is arrived at after we roll forward our valuation base year to FY21 (Jun). We continue to like the stock within OSATs space, trading at only 14.4x FY21F P/E (ex-cash P/E: 9.5x) vs the KLTEC sector average of 22x.
   
• Broadly within. 1HFY20 core profit of MYR88.6m came broadly within both our and Street’s expectations at 58% and 59% respectively, as we expect 2H to come in weaker seasonally. YoY, 1HFY20 revenue was slightly lower by 3.6%, mainly dragged by its US (-16%) and Europe (-5%) segment, possibly due to the weak market conditions and trade war tension. Nevertheless, earnings were flat on the back of better cost savings initiatives, lower financing cost (-56.2%) and lower effective tax rate (-1.2 ppt).
   
• Cost savings efforts continue to bear fruit. 2QFY20 core profit of MYR50.4m (+8% YoY) is the second highest quarter in recent years, thanks to higher revenue (+3.9% YoY). QoQ, core profit climbed 32% on higher revenue contribution (+12.1%) and also better cost saving efforts which saw the EBITDA margin increase by 2.2 ppts. We applaud management for its effective cost control that has yielded positive results thus far.
   
• Overall challenging business landscape. The group expects a challenging business environment in 2H20 due to the uncertainties in the global economy as well as the impact from the recent COVID-19 outbreak, which may have dented overall business sentiment. As such, management will continue to focus on improving its operational efficiencies with more automation and product development enhancement.

• We leave our forecasts unchanged as the results were in line. Maintain BUY with higher TP of MYR13.22 (based on 17x target P/E, +2.5SD above mean) as we roll forward our valuation base year to FY21 (Jun). We continue to like the stock as it is a value BUY among the OSATs on the back of a solid balance sheet (net cash of MYR798m), with potential M&A opportunity. The stock is currently trading at only 14.4x FY21F P/E, or ex-cash P/E multiple of 9.5x, vs the KLTEC sector average of 22x.

• Risks. Slower-than-expected orders, further escalation in the trade war, and a stronger-than-expected MYR vs USD.

Source: RHB Securities Research - 27 Feb 2020