Stripping out i) minority interest (RM5.2m), ii) unrealized translation loss on US dollar-denominated loans (RM19.3m) and iii) loss on derivatives (RM1.6m), D&O posted core earnings of RM66.8m for the 1HFY22. The results missed our expectation though is in line with market expectations, making up 43% and 46% of full-year numbers, respectively. The weaker-than-expected results were also attributed to the additional wages of RM1m/mth due to higher minimum wage rate of RM1,500/mt implemented in May 2022. Consequently, we cut our FY22-24 earnings forecasts by 5%-8% to reflect higher labour costs. On the positive side, Plant 2 is scheduled to be in commercial operation by 4Q 2022, which will help push its capacity expansion higher by at least 30% this year. Reiterate Outperform call with a lower TP of RM5.16 (previously RM5.46) pegged to 35x FY23 EPS.

• Robust sales growth. During 2QFY22, group sales rose 16% YoY to RM242m, driven by stronger sales from both interior and exterior automotive LEDs as well as higher automotive LED adoption in the electric vehicle (EV) segment. Asian and European markets contributed to the stronger automotive LED sales. The Asian market, which accounted for 70.8% of group sales, grew 18% YoY to RM171.4m. The European market, its 2nd largest sales contributor, rose 26.2% YoY to RM51m. Meanwhile, sales from the US market slipped 14.9% YoY to RM14.3m.

• Core profit jumped to RM35.1m. Stripping out the unrealized translation loss (RM18.8m) on US dollar-denominated loans, which the Group procured to part-finance its US dollar-denominated equipment purchases for expansion, the Group posted core earnings of RM35.1m, up 34.5% YoY. 2QFY22 gross margin slipped from 30.5% to 27.9%, dragged by lower plant utilization and minimum wage hike implemented in May 2022. Nevertheless, gross margin is expected to normalise in 4QFY22 on the back of increasing capacity production and additional headcount. Based on our projection, capacity utilization remained steady at around 75%-80% during the second quarter. Meanwhile, the Group has spent RM94.6m on capital expenditure (capex), up 44% YoY. It has also spent about RM4m on a 3-storey extension building at Plant 2 site to cater for non-production floors. Overall, capex for FY22 is expected to be around RM170m-180m, mainly for the capacity expansion.

• Raising China’s electric vehicle sales forecasts. Despite seeing weaker car sales in the 1H 2022 due to the strict Covid-19 lockdowns and restrictions imposed in several key provinces, the China Passenger Car Association has raised its estimate for electric-vehicle sales projection from 5.5m to 6m this year. It also added that the increased forecast of 6m is still “relatively cautious” and could be further increased at the start of the fourth quarter. Despite sporadic outbreaks of Covid-19 in parts of the country, overall auto production and supply chains have largely recovered. Passenger-vehicle sales may resume double-digit growth in the 2H after falling for four consecutive quarters because of supply chain constraints.

Source: PublicInvest Research - 24 Aug 2022