OPPSTAR’s 1HFY24 results disappointed. Its 2QFY24 core net profit declined 24.5% QoQ on an 10.5% contraction in top line as certain higher-margin turnkey projects were at their tail-ends while the expanded headcount for future growth also weighed. We cut our FY24F net profit forecast by 10% but maintain our TP of RM1.82 and MARKET PERFORM call.

Below expectation. OPPSTAR’s 1HFY24 earnings of RM9.3m missed our expectations, accounting for only 33% and 32% of both our full-year forecast and the full-year consensus estimate. The variance against our forecast came largely from a sharper-than-expected decline in contributions from certain turnkey projects at their tail-ends.

Results’ highlights. QoQ, OPPSTAR’s 2QFY24 revenue fell 10.5% as certain higher-margin turnkey projects were already at their tail-ends (- 13.4%). Note that turnkey projects typically account for c.68% of the group’s revenue with the balance 32% from low-margin specific design services and post-silicon validation services. Compounding the impact was an increase in higher cost of sale (+3.6%) as the group expanded its headcount to 270 workers (from 253 in 1QFY24) for future expansion. As a result, its net profit declined sharply by 24.5%.

Running a marathon. OPPSTAR operates on the cutting edge of the semiconductor industry, poised for growth driven by the increasing demand for customised chip design services in the expanding field of artificial intelligence (AI). Its neutral stance in the US-China tech conflict positions it favourably to capitalise on project opportunities from both parties. While incurring initial expenses slightly ahead of revenue, this approach is imperative to ensure preparedness for future opportunities.

Shariah-compliant. It recently attained shariah-compliant status in the November 2023 review, broadening its appeal and accessibility to a wider investor base. This significant qualification further expands the group's potential for attracting a diverse range of investors who prioritise shariahcompliant investment opportunities.

Forecasts. We cut our FY24F net profit forecast by 10% to reflect a larger earnings gap between old and new projects but maintain our FY25F numbers.

We maintain our TP of RM1.82 based on an unchanged 30x FY25F PER, which translates to a c.25% discount (previously 15%) to the mean forward PER of its larger international peers (see page 2) given the widened gap in terms of size between OPPSTAR and its international peers. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment thesis. We like OPPSTAR for: (i) its foothold and growing presence in the front-end semiconductor space with high entry barriers, specifically, stringent qualification requirements, (ii) its strong design capabilities in leading-edge process nodes, and (iii) its diverse customer base, i.e. both from the East and the West given its strong working relationships with various foundries. However, its tepid profit performance at this juncture leaves the group vulnerable to temporary fluctuations during transitions between projects. Maintain MARKET PERFORM.

Risks to our call include: (i) longer-than-expected gestation period for its regional expansions, (ii) single customer concentration risk with c.68% group revenue derived from Xiamen KirinCore, and (iii) economic downturn resulting in customers slowing down the development of new ICs.

Source: Kenanga Research - 27 Nov 2023