OPPSTAR’s FY24 results disappointed. Its FY24 core net profit fell 34%, weighed down by increased headcount to drive expansion.  Oppstar has recently partnered with Samsung’s wafer fab to be an enabler for fabless tech players, in addition to its expansion to Japan and China. We fine-tune down our FY25F earnings forecast by 1% and trim our TP to RM1.70 (from RM1.72). Maintain OUTPERFORM.

OPPSTAR’s FY24 earnings of RM13.3m missed our forecast and the consensus estimate by 39% and 35%, respectively. The key variance against our forecast came largely from turnkey project contributions not coming in timely.

YoY, its FY24 revenue dipped by 2% due to a slow pick-up in its turnkey design segment’s turnover, which is uncommon for turnkey design projects, partially cushioned by improved performance from its specific design and post-silicon validation services. However, its core net profit plunged by a steeper 34% due to increase in its headcount to 290 (from 230 in FY23) to support business expansion.

QoQ, its 4QFY24 core net profit plunged 91% on a 20% decline in its revenue on the back of weak performance from both turnkey and specific design projects. This could be partially attributable to the Chinese New Year break as >c.50% of its orders is catered to its key Chinese customer. Not helping either, similarly, was the increase in its headcount.

Outlook. OPPSTAR is still very much in its expansionary phase with a target to increase its headcount to 500. This ambitious goal is to cater for future demand as the group foresees growing demand for customised chip design services amidst the escalating race for AI supremacy. It has also embarked on a multi-prong strategy to capture more businesses from: (i) Japan where it it has completed the acquisition of a local Japanese design house and is currently getting more enquiries, (ii) its 50%-owned JV, Shanghai Longhuixin Integrated Circuit Group Co, where it co-develops and co-owns IPs, and (iii) the collaboration with Samsung’s wafer fab which will elevate it to be an enabler for fabless tech players, focusing on 14nm node.

Forecasts. We fine-tune down our FY25F earnings forecast by 1% and introduce our FY26F earnings forecast projecting 15.5% growth.

Valuations. We tweak our TP down to RM1.70 (from RM1.72) based on an unchanged 30x FY25F PER, at about 40% discount to the mean forward PER of its peers (see page 2) to reflect OPPSTAR’s significantly smaller size and more limited capabilities vs. 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).

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. Maintain OUTPERFORM.

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 - 31 May 2024