D&O's 9MFY24 results fell short of expectations, impacted by weaker turnover and margins. Nonetheless, the group remains confident in achieving FY24 revenue growth, supported by strong automotive LED demand and its downstream expansion through Dominant Electronics (DE). Secured orders for EV and automotive modules in Europe and the USA position D&O for long-term growth amid shifting industry dynamics and geopolitical tensions.

Following a review, we revised down FY24-25F earnings by 13-6%, respectively, TP to RM2.50 (from RM2.64), but maintain our OUTPERFORM call.

Below expectations. 9MFY24 net profit of RM37.3m came in below expectation, accounting for 52% of our and 49% of the street's full-year consensus estimate. The deviation from our forecast was primarily due to our lower-than-expected turnover and GP margin assumptions.

YoY, 9MFY24 revenue improved 15% primarily due to new design wins, notably in Smart LED ambient lighting, rear combination lamps, and headlamp applications. Regionally, Asia and Europe recorded strong growth of 13% and 27%, respectively, while other markets expanded by 3%. However, demand from the US market contracted slightly by 2%. The group's GP margin improved to 20.2% from 19.1% a year ago, attributed to better capacity utilisation, cost management, and productivity enhancements, though partially offset by adverse forex impacts on material costs. EBITDA surged 81% to RM171m, largely due to lower base effect, as 9MFY23 was impacted by slower demand in the 1H of that fiscal year. Correspondingly, its PAT increased proportionally.

QoQ, despite a 3% YoY decline in global car sales, revenue managed to inch up by 3%, reflecting resilience amidst challenging market conditions. GP rose by 5%, supported by higher revenue and improved production capacity utilisation, which increased to approximately 78% from 75% in the previous quarter. This, coupled with forex gains on material costs, contributed to a substantial improvement in PBT, which rose to RM20m.

Outlook. Despite near-term challenges from weaker consumer sentiment, geopolitical risks, and an expected single-digit decline in the global car production, D&O remains optimistic on achieving revenue growth for FY24. The long-term outlook for automotive LEDs is robust, driven by their durability, energy efficiency, and automakers' focus on safety and design innovation. To capitalise on this, D&O expanded into downstream operations via Dominant Electronics Sdn Bhd (DE), which has secured customer orders for automotive modules, particularly in Europe and the USA. DE's positioning and diverse product offerings (such as modules for EV control unit, sunroof controllers, door control modules, and remote keyless entry systems), are expected to drive growth amid industry shifts and geopolitical tensions.

Forecasts. We have revised our FY24/25F net profit down by 14%/6% to RM63m/RM114m, reflecting reduced plant utilisation assumptions of 78%/80% (from 80%/81% previously) and adjusted margin expectations.

Valuations. Correspondingly, we have reduced our TP to RM2.50 from RM2.64 previously, based on an unchanged targeted FY25F PER of 27x, in line with its peers' (i.e. Vitrox and Penta) forward average. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We like D&O for: (i) its unique exposure in the automotive LED business, (ii) its penetration into the electric vehicle market, and (iii) venture into next-generation smart LEDs which yield higher margins. Maintain OUTPERFORM. Risks to our call include: (i) a sharp decline in automotive demand, particularly for electric vehicles (EVs), (ii) an unexpected slowdown in the growth of the smart LED segment, and (iii) a general slowdown in the global economy.

Source: Kenanga Research - 25 Nov 2024