OPPSTAR's 1HFY25 results disappointed, with net profit plunging 96%. The negative surprise to our and street's expectations was explained as a deliberate shift of strategy into aggressive pricing to capture market share. Partnering with Samsung's wafer fab to enable fabless tech players, the QoQ revenue jump reflects this strategy pivot, but margins are likely to face significant pressure over the next 1-2 years. Post result review, we have revised our FY25-26F net profit downwards by 73-35%, to RM3.7-13.7m, respectively. Consequently, we have lowered our TP by 35% to RM0.54 and downgraded our rating to UNDERPERFORM, considering the gestation period.

OPPSTAR's 1HFY25 net profit of RM0.4m missed expectations, accounting for only 2.7% of our and 2.8% of the street's full-year estimate. The key variance against our forecast was mainly due to lower-than-expected margin assumptions, as the group implemented a competitive pricing strategy to attract new orders and customers.

YoY, its 1HFY25 revenue increased by 18% to RM35m, driven mainly by its IC design and post-silicon validation services, along with the new semiconductor wafer and components sales segment. However, PBT plunged 89% to RM1.3m, while NP fell by 96% to RM0.4m, mainly due to lower turnkey design services revenue, adoption of competitive pricing strategy, higher labour costs, initial losses from the new business segment, as well as higher taxation from withholding tax expenses.

QoQ, revenue surged 61% to RM22m, largely driven by strong sales in the new semiconductor wafer and components segment, which contributed RM11.7m or 53.8% of total revenue. However, this was partially offset by a 54% decline (to RM3.0m) in revenue from turnkey design and post-silicon validation services. Despite higher turnover, the group recorded a LBT of RM1.6m, impacted by lower turnkey design service revenue, implementation of competitive pricing strategy, higher labour costs (with a 12% increase in engineering headcount to 296) and start-up losses of RM0.2m from the new semiconductor wafer and components sales segment.

Outlook. OPPSTAR acknowledges challenges such as price sensitivity and rising labour costs but sees opportunities in the recovering semiconductor industry to strengthen its market position. The Group is focused on improving operational efficiency, diversifying revenue streams, and expanding the semiconductor wafer and components segment for sustainable growth.

Strategic priorities include pursuing partnerships, particularly with foundries for chip manufacturing, and further investment in the post-silicon segment.

While topline growth is expected to improve, margins will likely remain under pressure over the next 1-2 years due to the new business's longer gestation period, lower production yields from competitive pricing, and persistently high staff costs.

Forecasts. We have slashed our FY25 and FY26F earnings forecast by 73% and 35% to RM3.7m and RM13.7m, respectively, post reducing our margin assumptions followed the implementation of competitive pricing strategy, although we assumed a 40% increase in revenue for FY26 on the back of this deliberate pivot.

Valuations. We reduced our TP to RM0.540 (from RM0.820) based on an unchanged 30x FY26F PER, at about 40% discount to the mean forward PER of its peers to reflect OPPSTAR's significantly smaller size and more limited capabilities vs. its global counterparts. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Risks to our call include: (i) shorter-than-expected gestation period for its regional expansions, (ii) better-than-expected margin due to higher production yield, and (iii) potential aggressive US-China sanctions on semiconductor components, which could lead to customers shifting away from China and increasing development orders for new ICs in SEA including Malaysia.

Source: Kenanga Research - 26 Nov 2024