• Result in line with our expectations, but missed consensus

• Revenue growth trajectory remains intact, but higher revenue base needed to drive stronger margins

• Maintain BUY rating and target price of RM3.00

Slow and steady

D&O experienced a steady recovery in 3Q24, driven by tailwinds such as stronger car sales in China, improved production efficiency and increasing traction for its LED products. The RM273m quarterly revenue recorded this quarter was the highest recorded by D&O, surpassing 3Q23, signaling positive growth trend. This was supported by higher utilization levels of 77% during the quarter, up from 73% in 2Q24. While revenue matched that of 3Q23, EBITDA margin contracted 2ppts, which we believe was due to a shift in sales mix and a higher operating cost structure. We estimate that D&O would need to sustain a utilization level of 85% to see margins returning to their peak of 22%. This report marks a transfer of coverage.

9M24 in line with our expectations

Overall 9M24 core net profit of RM41m came in at 74% and 57% of our and consensus’ full- year forecasts, respectively. This was within our expectations, but below consensus expectation with deviation arising from weaker-than-expected margin recovery. We expect a stronger sequential revenue growth in 4Q24 supported by seasonal trends, with utilization levels reaching closer to 80% level.

Maintain BUY with TP of RM3.00

Our 12-months TP at RM3.00 remain unchanged, based on target 40x PE multiple (-0.5SD of its 5-year mean) applied on 2025E EPS. Despite our earnings forecast differing from consensus due to a more conservative margin outlook, we remain positive on D&O for its strong position in the global automotive LED market, with significant potential for continued market share growth. Maintain BUY. Downside risks include strengthening of the RM, loss of customers, production hiccup and prolonged weakness of car sales market in China

Source: Philip Capital Research - 25 Nov 2024