• Genetec’s 3QFY6/24 core net profit rose 36% yoy, meeting our expectations.

• Potential BESS tender opportunities in Malaysia amounting to 2.2GWh could offer upside to Genetec’s earnings via its new BESS segment, in our view.

• Reiterate Add. Valuation looks attractive at 15.1x FY25F P/E vs. comparable peers’ 25.2x. Recent stock weakness offers good opportunity to accumulate.

No surprises in 3QFY6/24

• Genetec Technology’s 3QFY6/24 core net profit rose by 36% yoy to RM27.1m (ex- unrealised forex loss and derivatives gain of RM3.9m), driven by a sizeable increase in its operating margins (up from 25.7% in 3QFY23 to 38.6% in 3QFY24) despite the fall in revenue (-10% yoy), largely due to more favourable product mix and ongoing cost optimisation initiatives. For the 9MFY6/24 period, core net profit rose by 7% to RM61.0m and was in line with our forecast, making up 58% of our 15-month FY24F estimate (Genetec’s FY-end was changed from Mar to Jun in Nov 2023).

Briefing updates

• We expect positive momentum in subsequent quarters, as orderbook visibility from its EV and automotive key customers remain strong, in addition to growing revenue recognition from its energy storage segment. At its analyst briefing, management reiterated its orderbook replenishment target of c.RM615m over the next 12-15 months, to add to its latest orderbook size of RM267m. Genetec is eyeing around RM475m of new jobs from its US-based EV customer, as well as another RM140m orderbook from its automotive customer. Given that these are single-sourced, recurring jobs, we view the chances of securing them as very high.

• Genetec is also planning to set up a new office in the US as part of its strategy to remain in proximity to its current key customers, while also opening up opportunities to secure new customers in other industries, such as aerospace. This set-up may later be converted into a manufacturing hub to provide automation solutions, should its business funnel materialise into more substantial job wins.

• On the energy storage side, management guided that the total BESS tender size opportunity in Malaysia amounts to c.2.2GWh over the next 12-24 months, given the strong traction in renewable energy and power grid enhancement projects. Genetec guided that it had participated in tenders of 705MWh BESS capacity to-date, with a 1,500MWh tender job opportunity coming up for CY24F. While BESS ASP has fallen to below RM1mil per MWh due to lithium price drop, Genetec’s cost pass-through pricing mechanism should ensure stable margins for the segment, in our view.

Reiterate Add

• We keep our Add call with an unchanged GGM TP of RM3.60 (WACC: 9.5%; LTG: 6%). The stock is currently trading at an attractive valuation of 15.1x FY6/25F P/E, which is lower vs. comparable peers’ 25.2x. Strong order wins from its EV/auto customers and demand surge for its BESS solutions are potential re-rating catalysts. Key downside risks are a rapid slowdown in the EV segment, resulting in poor orderbook replenishment, and its BESS solutions ramp-up failing to materialise.

Source: CGS-CIMB Research - 28 Feb 2024