Excluding i) the gain on foreign exchange (RM7.9m), ii) customer compensation related to the new smart LED products (RM10.1m), iii) inventory impairment (RM10.5m), and iv) impairment losses on trade receivables (RM2m), D&O registered 9MFY24 core profit of RM52.5m, accounting for only 59% and 69% of our and consensus full-year expectations, respectively. In view of the steep slowdown in global car sales, we cut our FY24-26F earnings forecasts by 34-37% to reflect the weak sentiment. We expect a steep pullback in the final quarter due to the worsening car inventory overhang situation. Downgrade to Neutral with a lower TP of RM1.99 based on a lower 30x (down from previously 35x) multiple on FY25 EPS. A first DPS of 0.3sen was declared for the quarter.

• 3QFY24 revenue was marginally higher. During the quarter, revenue climbed from RM271.9m to RM273.2m, led by new design wins, especially in i) smart LED ambient lighting, ii) rear combination lamps, and iii) headlamp applications. Asia, which accounted for 69% of total sales, saw a marginal drop of 0.8%. On the other hand, the European market, which is the 2nd largest sales contributor, rose 2.4% YoY to RM64.1m. Sales from the US market increased by 7.9% YoY to RM16.4m. Capacity utilisation improved from 2QFY24's 70% to 75%.
• 3QFY24 core profit tumbled 43% YoY. Excluding the exceptional items, the group saw its core net profit shrink from RM30.4m to RM17.4m, mainly dragged by higher material costs, which were previously purchased at higher USDMYR levels, and higher distribution expenses (+55.7%). It is noted that the Group also incurred higher customer compensation of RM3.9m in relation to the smart LED products launched in 2022. Gross margin slipped from 23.9% to 20%.
• No signs of slowing down capex this year. During 9MFY24, the Group spent RM110.6m on i) new production lines for Rear Combination Lamp (RCL) Spice Plus 2520, ii) machinery upgrades, iii) plant automation, and iv) quality control to cushion the impact of the minimum wage hike effective next year. It also bought a 21-acre parcel of agriculture land nearby its existing plants for the future module business expansion.
• Module operations have commenced. The downstream projects, which are mainly catered to Hirain Beijing's customer outside of China, are involved in the module production for i) electric vehicle control unit, ii) sunroof controller, iii) door control module, iv) remote keyless entry, and others. Currently, there are three production lines and it targets to have a total of four lines by year-end. D&O targets to have a total of nine production lines by 2026. Each production line costs about RM4m-5m. Based on our estimates, the consignment basis projects could potentially fetch better margins than the current at Group level, which we expect to contribute about 10% to our FY26F earnings forecasts.

Source: PublicInvest Research - 25 Nov 2024