OPPSTAR has put in place building blocks for growth, namely, Samsung’s wafer fab collaboration, expansion in the Japanese market and broadening the offerings of its post-silicon validation services. It shared that its recently announced 1QFY24 results could have been stronger had a turnkey project from a Chinese customer come in sooner. We keep our forecasts, TP of RM1.70 and OUTPERFORM call.

We came away from OPPSTAR’s post-4QFY24 results briefing feeling reassured of its prospects. The key takeaways are as follows:

1. It has put in building blocks for growth in place. Its collaboration with Samsung will bring about a recurring revenue stream alongside the life- cycle of the customer’s product. OPPSTAR has also identified low- hanging customers with the possibility of moving beyond the initial non- recurring engineering (NRE) phase (which typically takes two years) in FY25. Meanwhile, Oppstar Japan is now working with nine new Japanese customers. It can leverage on this track record to bid for more complex projects down the road. It also plans to broaden the offerings of its post-silicon validation services.

2. Its order book as at end-1QFY24 declined to RM18.2m (from RM24m three months ago) as a turnkey project from a Chinese customer did not come in sooner. Half each of the order backlog came from: (i) turnkey design (largely contributed by Xiamen KirinCore), and (ii) specific design projects (mainly from Malaysian-based MNC and Japanese customers).

Its customer base has expanded to 23 (up from 12 in FY23) driven by new customers mostly for specific design projects and the acquisition of a Japanese design house.

3. We understand that OPPSTAR’s weaker 4QFY24 revenue (-20% QoQ; -17% YoY) was mainly due to lower recognition from the turnkey design segment (-32% QoQ; -20% YoY) while the specific design segment (+22% QoQ; -9% YoY) remained fairly stable. Note that the turnkey design segment commands c.71% of the group’s revenue and typically yields better margin compared to specific design jobs (c.28% of group revenue). Its performance could have been stronger had a turnkey project from a Chinese customer come in sooner as mentioned.

Forecasts. Maintained.

Valuations. We keep our TP of RM1.70 based on an unchanged 30x FY25F PER, at a c.40% discount to global peers’ forward average (see Page 2) due to the substantial disparity in revenue size 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 5).

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.60% group revenue derived from Xiamen KirinCore, (iii) economic downturn resulting in customers slowing down the development of new ICs.

Source: Kenanga Research - 4 Jun 2024