Kenanga Research & Investment

Oppstar - A Good Start to FY24

kiasutrader
Publish date: Tue, 29 Aug 2023, 09:46 AM

OPPSTAR’s 1QFY24 met expectations. It 1QFY24 top line grew 8% QoQ on stronger billings from turnkey design services coupled with maiden contribution from a new project. We like OPPSTAR as a good proxy to the front-end semiconductor space. We keep our forecasts, TP of RM1.82 and MARKET PERFORM call.

Within expectation. OPPSTAR’s 1QFY24 earnings of RM5.3m (-3.5% QoQ) came in at 19% of both our full-year forecast and the full-year consensus estimate. However, we deem the results within expectations as we anticipate better quarters ahead on stronger billings.

Results’ highlights. QoQ, OPPSTAR’s 1QFY24 revenue grew 8% underpinned by stronger billings from turnkey design services (which contributes c.70% of the group’s revenue) and a newly secured project in the reported quarter. The group also saw satisfactory contributions from the specific design and post-silicon validation services which makes up the remaining c.30% of the group revenue. However, there was slightly higher effective tax during the reported quarter of RM1.5m (vs. RM1.3m) which resulted in a marginal dip in net profit by 3.4%.

Growing demand for customised chips. The demand for outsourced customised chip design services is strong with technology including AI advancing at breakneck speed. Many companies are actively pursuing AI development to enhance workflow efficiency, making it clear that the market for customised chip design will continue to flourish. Furthermore, the ongoing chip war between the US and China presents a favourable landscape for companies like OPPSTAR. With a neutral position, the group is wellpositioned to capitalise on the situation and seize project opportunities from both parties.

Forecasts. Maintained.

We maintain our TP of RM1.82 based on an unchanged 30x FY25F PER, representing c.15% discount to its global peers with larger market capitalisation (see page 2). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment thesis. We like OPPSTAR for: (i) its foothold and growing presence in the front-end semiconductor space with high entry barriers, specifically, stringent qualification requirements, (ii) its strong design capabilities in leading-edge process nodes, and (iii) its diverse customer base, i.e. both from the East and the West given its strong working relationships with various foundries. Maintain MARKET PERFORM.

Risks to our call include: (i) longer-than-expected gestation period for its regional expansions, (ii) single customer concentration risk with c.68% group revenue derived from Xiamen KirinCore, and (iii) economic downturn resulting in customers slowing down the development of new ICs.

Source: Kenanga Research - 29 Aug 2023

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