KEY INVESTMENT HIGHLIGHTS

• Downgrade to NEUTRAL with a revised target price of RM2.07 post the 3QFY24 results announcement
• Unfavourable sales mix in 3QFY24 led to -69.1%yoy contraction in earnings to RM6.5m
• The pace of earnings recovery of RM29.2m (+29.1%yoy) seen for 9MFY24 lacked ours and consensus expectation
• Earnings growth in the near-term could potentially be capped by the near-term decline in the global automotive production

Near-term weakness in the automotive industry. We are downgrading our recommendation for D&O to NEUTRAL from BUY previously with a revised target price of RM2.07 (previously RM3.85).

The group posted weak 3QFY24 normalised earnings which was mainly impacted by the unfavourable sales mix. On a cumulative basis, 9MFY24 earnings grew by less than +30%yoy. We view that the pace of earnings recovery was rather tepid, given the low base in FY23. While we expect the LED count per vehicle will steadily increase, the near-term slowdown in global automotive production could potentially cap the group's earnings growth.

Unfavourable sales mix. D&O reported resilient 3QFY24 earnings of RM18.3m as compared to 3QFY23. However, after adjusting for normalizing items which mainly consist of forex impact, 3QFY24 normalised earnings came in lower at RM6.5m. While the automotive revenue was marginally down by -0.4%yoy to RM266.8m, the change in sales mix led to a lower profit margin of 2.4% from 7.7% a year ago.

Slower-than-expected pace of recovery. On a cumulative basis, D&O's 9MFY24 normalised earnings amounted to RM29.2m, a recovery of +29.1%yoy. This was mainly supported by higher capacity utilisation as well as better cost management and productivity improvement. Note that the automotive revenue improved by +14.5%yoy to RM795.5m.

Nonetheless, D&O's 9MFY24 financial performance came in below ours and consensus expectation, making up 33.6% and 38.4% of full year FY24 earnings estimates respectively.

A more moderate earnings estimate. Premised on the slower-than- expected recovery, we adjust FY24 to FY26 earnings by -27.8% to - 43.9% as we lower our revenue assumption and profit margin assumption to reflect the changed in product mix.

Conservative target price. Consequently, after our earnings adjustment, our target price has been revised downward to RM2.07 (previously RM3.85). Note that we also lower our target PER to 33.4x (previously 40.8x) which is the five-year mean. This is to account for the near-term weakness in the automotive industry.

Source: MIDF Research - 25 Nov 2024