The Group reported a sequentially stronger 2QFY23 net profit of RM46.5m (+15.9% YoY, +25.1% QoQ), a reflection of its healthy order flows from a key customer even amid reported weakness in global consumption spending. Cumulative 1HFY23 net profit of RM83.7m (+15.3% YoY), while only making up 46% and 45% of our and consensus full-year estimates, is still deemed as in line as we head into a seasonally stronger 3QFY23. The Group is also expected to see steadier earnings growth going forward, underpinned by the rollout of new products for key customers, contributing to a multi-year growth spurt. We trim FY23 estimates by 8.3% however, to account for commissioning delays in a product line, though we keep FY24/FY25 estimates unchanged. Our Outperform call is affirmed with a slightly-lowered PE-derived target price of RM2.01 (RM2.04 previously), based on a 15x multiple to CY23 earnings.

• 2QFY23 performance. The current quarter is a lead-up to the seasonally stronger 3Q, a period typically synonymous with festive-related spending (Christmas and New Year) and/or iconic shopping-heavy days like Thanksgiving (in the US) and “Singles Day” (in China), though a noticeably higher interest rate environment (globally) this time round may cap enthusiasm.
  Performance this current quarter is encouraging nonetheless, with revenue of RM736.5m (+33.0% YoY, +32.7% QoQ) recorded. While the relatively stronger YoY performance is partly due to end-effects of movement restrictions imposed last year, the stronger sequential performance is reflective of healthy order flows from a key customer even amid reports of waning global consumption. Net margin was at a steady 6.3% (1QFY23: 6.7%) and which is expected to be sustainable at the ~6% range going forward. Weakness in the current quarter, we gather, is due in part to its product mix, in addition to some start-up losses and also RM3.2m in foreign exchange losses, the latter likely to be able to be clawed back given the Group’s cost pass-through arrangements.

• Healthier prospects ahead. The Group continues to spend on expanding its capacity to cater for new orders from its key customers. While we are trimming FY23 earnings estimates to account for product commissioning delays, forward numbers are kept unchanged as the Group remains on track to commence production on other products in the coming financial year.

Source: PublicInvest Research - 1 Dec 2022