We came away from our meeting with D&O reaffirmed that 2HFY22 may see stronger performance despite a slight delay in the commissioning of its Plant 2. Order visibility has been extended till year-end as the group sees a new trend taking off for larger infotainment displays which require 3-4x more LEDs compared to smaller ones. All in, we tweak our forecast for FY22F/FY23F by -5.2%/-2.4% to account for the slight delay in its production ramp up. Maintain our OUTPERFORM call with a lower TP of RM4.45.
We had a meeting with D&O with the following key takeaways:
1. We came away from the meeting reaffirmed that there is still a strong possibility for a better performance in 2H despite a slight delay in the commissioning of Plant 2 as the group’s order visibility has been extended into November. In addition, its annual sales conference with key customers is also suggesting a firm double-digit growth for 2022. D&O has started the production of its proprietary smart LEDs (targeted for EVs) in 2Q 2022, albeit minimal to the group’s revenue, indicating more room for growth.
2. Meanwhile, the group has begun to benefit from higher demand for interior LEDs as many car manufacturers are moving towards larger infotainment displays as well as the adoption of digital instrument clusters. The recent trend of moving beyond a 10-inch infotainment display requires a different illumination configuration known as direct-lit as opposed to edge-lit which does not have sufficient LEDs to evenly light up the display. We gather that a typical edge-lit display requires 100-150 LEDs while a direct-lit display could see an increase of 3x-4x.
3. To address the unrealised foreign exchange losses due to rising USD, the group will take the following steps namely: (i) restructuring its borrowing exposure by lowering its USD borrowings to match its USD sales, and (ii) increase its cash holdings to a minimum of 50% in USD. This process will take c.1-2 months and is expected to mitigate future occurrence of lumpy foreign exchange fluctuation.
Forecasts. We tweak our forecast for FY22F/FY23F by -5.2%/-2.4% to account for the slight delay in the ramp up of its Plant 2.
We keep our OUTPERFORM call with a lower Target Price of RM4.45 (previously RM4.50) based on 25x FY24F (CNP RM220.2m) PER, in line with peers’ forward average. There is no adjustment to TP based on its 3-star ESG rating as appraised by us (see Page 4).
Risks to our call include: (i) disruption of components supply, (ii) replacement/obsolescence of LED technology, (iii) sharp decline in automotive demand.
Source: Kenanga Research - 25 Aug 2022