After excluding loss on foreign exchange amounting to RM5.7m, ii) customer compensation related to the new smart LED products (RM1.4m), iii) gain on derivatives (RM3.8m), iv) inventory impairment (RM4m) and v) impairment losses on trade receivables (RM2m), D&O kick started 1QFY24 with core profit of RM19.7m, making up 17.0% and 17.2% of our and consensus full-year expectations, respectively. Nevertheless, we deem the results in line as the first half of the year is seasonally weaker due to shorter working days in China and Malaysia. Maintain Outperform with an unchanged TP of RM4.20 based on 35x FY25 EPS. No dividend was declared for the quarter.

• 1QFY24 topline rose 27.5% YoY. 1QFY24 group sales improved to RM273.7m from 1QFY23’s RM214.7m, driven by all key operating countries. Asia, which accounted for 60.9% of group sales, advanced 21.3% YoY to RM166.7m. The European market, its 2nd largest sales contributor, surged 45.9% YoY to RM86.5m. The US market rose 18.2% YoY to RM16.9m.

• 1QFY24 core profit made a strong rebound. Excluding the exceptional items, the group saw its core net profit leap from RM0.9m to RM19.7m, attributed to i) improved capacity utilization of 70% and ii) better cost management and productivity. Gross margin recovered from 15.8% to 21.0%. During the quarter, the Group spent RM34.9m on new production lines, machinery upgrades, plant automation and quality improvements. Inventory turnover rose to 6.7-month level as it stocked up more integrated circuit (IC) chips ahead of strong deliveries in subsequent months.

• Optimising existing floor space. The Group intends to undertake further productivity enhancement projects at existing plants, which includes the implementation of i) double deck sorters in the next 2 months (floor s pace saving: 40%), ii) double deck dispenses (floor space saving: 80%), iii) flip chip bonding technology(increase LED output from 12k pieces/hour to 32k pieces/hour), iv) migration to compression moulding (increase of throughput from 12 pieces/hour to 43k pieces/hour) and v) robotic material transport. With these initiatives, it is expected to save at least 35% of floor space in both its first manufacturing plants. In view of this, the construction the Plant 3, which costs about RM214m, will be deferred to 2027.

• Outlook. Plant 2, which has the capacity revenue of RM800m-RM1.3bn, is expected to be ramped up by 3QFY24 starting with high-end products such as smart LED and head lamp LED application. Management has allocated capex of RM150m for both Plant 1 and Plant 2 capacity expansion by 10% YoY. Meanwhile, smart LED sale are expected to rise from 7% to 10% this year. On the module business, it has secured several projects such as i) EV control unit, ii) EMS product and iii) battery management from Hirain Beijing. The PCBA segment is expected to contribute at least 5% to the group’s bottomline this year before seeing a surge by 2-3x in 2025-2026. Overall, it expects a higher capacity utilization of 85% for Plant 1 this year.

Source: PublicInvest Research - 28 May 2024