• We remain positive on D&O’s 2025 outlook on the back of higher customer loadings, driving higher utilisation rate

• However, margin recovery is expected to fall short of expectations, impacted by weaker operating leverage from rising costs and slower-than-expected operational ramp up

• Cut EPS forecasts by 7-36%. Maintain BUY rating with lower TP of RM3.00

Expect higher volume loadings in 2025

We expect D&O’s plant utilisation to improve to 85% in 2H24 (1H24: 75%), driven by seasonally stronger demand and further bolstered by reduced inventory levels. Looking ahead, we expect 2025E earnings growth to be fueled by a robust product portfolio. Management expects the SmartLED sales to nearly double to 147m units, which we project will contribute c.10% of our total revenue. The demand for the SpicePlus 2520 taillight LED is forecasted to nearly double to 1bn units, benefiting from strong market penetration due to its superior specifications compared to competitors. The Nagajo 1519 LED, starting from a low base, is expected to see strong growth driven by increasing customer adoption. The Bevel LED 1515, designed for large-screen infotainment systems, with D&O being one of only two global producers, is poised to be the next growth phase in 2026-27E. Our recent site visit reinforced our positive outlook on D&O’s significant upside potential, with Plant 2 currently underutilised and offering ample capacity to ramp up for the next growth cycle.

New PCBA business kicking off in 4Q24

The new PCBA module business is expected to begin contribution from 4Q24. Currently running three lines for Hirain, a global automotive electronics player, D&O is looking to expand to 9 lines next year. The products being transferred include EV control units, sunroof switches, and door pad assemblies for the modules. Management expects RM10m in annual revenue for 2025E, contributing 1% to total revenue, with a 20-30% net profit margin.

Maintain BUY with a lower TP of RM3.00

We cut our 2024-26E earnings by 7-36% to reflect the slower-than-expected automotive LED sales growth and rising operating costs. We lower our 12-month TP to RM3.00 (from RM4.65) based on an unchanged target 40x PE multiple on 2025E EPS. We continue to like D&O for its unique exposure in the automotive LED business and its exposure to reputable global automotive brands.

Source: Philip Capital Research - 17 Oct 2024