OPPSTAR’s 9MFY24 results met expectations. We are unperturbed by a 6% dip in its 9MFY24 net profit, which was due to increased headcount to support future expansion. Its prospects are strong underpinned by rising demand for customised chip design services especially in the AI space. We keep our forecasts and TP of RM1.82 but upgrade our call to OUTPERFORM as value has emerged after the recent weakness in its share price.

Within expectation. OPPSTAR’s 9MFY24 earnings of RM14.0m accounted for 55% and 56% of both our full-year forecast and the fullyear consensus estimate, respectively However, we deem the results to be within expectation as we expect a better quarter ahead as the group recently secured a new turnkey award from its key customer.

YoY, OPPSTAR’s 9MFY24 revenue inched 3.3% on the back of better contribution from the specific design services as well as the post-silicon validation segment. This offset the weaker showing from the turnkey design services division. However, its core net profit dipped 6% due to higher staff cost as it expanded its headcount to 264 (vs. 203 in 9MFY23) which the group deemed necessary for future business expansion.

Forecasts. Maintained

Valuations. We maintain our TP of RM1.82 based on an unchanged 30x FY25F PER, a c.44% discount (previously 25%) to the mean forward PER to peers (see page 2). The increased discount is a result of a robust rerating among peer’s valuation. We choose to retain our current valuation, recognising the substantial disparity in revenue size and capabilities between OPPSTAR and 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).

Outlook. OPPSTAR has successfully secured additional design projects from its key customer, Xiamen KirinCore, alleviating concerns about order replenishment for its higher-margin turnkey design services segment. These should start contributing in the upcoming quarters, as the group has proactively initiated pre-design work, facilitating smoother revenue recognition later on. Amidst the escalating race for AI supremacy, Oppstar is actively pursuing collaborations with partners to leverage its neutral stance as a Malaysian company in the US-China tech war, positioning itself as the go-to IC design house in the region.

Investment case. 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. Value has emerged after the recent weakness in its share price. Upgrade to OUTPERFORM from 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 - 27 Feb 2024