Summary

• Below expectations. In 3QFY23, Supercomnet Technologies Bhd (SCOMNET) recorded core earnings at RM8.2m (-3% QoQ, -17% YoY), bringing the core net profit for 9M23 to RM24.1m (-10% YoY). The core net profit was below expectations, accounting to only 60% and 62% of ours (RM39.1m) and consensus (RM37.9m). Core earnings have taken into account the fair value expense related to share options granted under ESOS RM1.6m for 9M23 and RM0.78m on the transfer of listing expenses to main board. Meanwhile, the key deviations were mainly due to softer-than-expected demand in the medical and industrial segments.

• YoY. The core net profit fell 17% from RM10.1m in 3Q22 to RM8.4m due to (i) decreased orders from the industrial segment, (ii) dip in demand for the automotive segment, (iii) higher electricity tariff and (iv) fair value expense on ESOS. Besides, the decline in net foreign exchange gain by RM1.14m and the main board listing expenses impacted the dip in core earnings for 3Q22.

• QoQ. Core earnings inched lower by 3% to RM8.4m despite the improved in automotive and industrial segments, however the increase was mitigated by lower margin generated from the medical segment.

• YTD. As compared to 9M22, core PATMI fell 10% amid softer demand for all the 3 segments, higher electricity tariff.

• Dividend. 0.5 sen dividend was declared and the ex-date is on 7th of Dec.

• Margins continue to grow… In 3Q23, we noticed net margins has grew above 25% and may stay at current level for the rest of 2023 as the issue of defective products received from its FDA-approved supplier resolves.

• …with solid balance sheet. As at end-3QFY23, SCOMNET continues to maintain a solid balance sheet with zero borrowings and a cash position of RM50.0m.

• Outlook. Going forward, the medical segment (77.0% and 68% of total revenue in 3Q23 and 9M23 respectively) will be the main contributor to SCOMNET, premised on the introduction and commercialisation of new products in the pipeline. Also, the factory expansion plans are on track with the 2nd floor expansion in existing operations will add 990sqm of floor space. Over the next 3 years, SCOMNET will construct a new 5-storey building to house the production of new medical products, and will boost the production floor space by 12k sqm.

Valuation & Recommendation

• Forecast revised downwards. Given that the core earnings came in below expectations, we have revised downwards for our earnings forecast by 23-25% to RM29.7m, RM32.3m ad RM34.0m.

• Maintained BUY with lower TP at RM1.50. We maintain BUY on SCOMNET with a lower target price of RM1.50 (upside or 12.8%). Our target price is derived by assigning a target P/E multiple of 38.0x to FY24f diluted EPS of 3.94 sen.

• Investment risks include potential delay in the FDA approval of new product launches which affects the prospects of growth in new income stream. Fluctuation in raw material costs may affect margins whereby material cost accounts approximately 75.0% of SCOMNET production costs. Exposure to currency risk as most of their products is sold in USD.

Source: Mplus Research - 23 Nov 2023