Investment Merits

• Robust orderbook, due to demand from various industries

• Benefitting from the recovery in the semiconductor sector

• Increasing visibility of its manufacturing portfolio, especially in frontend equipment and among customers

• Sensible valuation of 18x FY24F P/E, with a solid balance sheet and healthy dividend yield

Company Profile

QES Group (QES) established itself as a one-stop specialist in manufacturing, distribution, and services of test, inspection, and measuring equipment, and engineering solutions. QES also manufactures optical inspection equipment and automated equipment primarily for the semiconductor segment. It has direct distribution networks in Malaysia, Indonesia, Vietnam, Hong Kong, Singapore, Thailand, and the Philippines via subsidiaries.

Highlights

Robust orderbook. This is supported by its robust sales channel and strength in its distribution business, which serves various industries like mining, and pharmaceuticals. There are opportunities from various subsegments, ie power, petrochemicals and E&E. QES stands to grow from its stable earnings base which, in turn, is due to repeat orders for its various analytical instruments, inspection, test, and measurement equipment, as well as ever-growing spare parts and service revenue from a higher installed base. Current orders in hand, valued at MYR116m (1.9x cover on FY23 revenue), should drive its growth in FY24 – this would be more towards 2H24, as a slow 1H24 is expected. This in line with the anticipated recovery of the semiconductor industry and ramp-up in the sales volume of devices, wafer handling, and inspection machines – with demand from local OSATs as well as from China.

Manufacturing portfolio is a major growth engine, given its higher margin and low base. The order intake from QES customers continues to remain robust, with current outstanding orders valued at MYR28m. These include orders for vision inspection equipment, wafer measuring systems, automated handling systems, and new products like wafer stockers. With a product range that covers the front-end segment, QES has received a few large orders from wafer fabrication customers, with deliveries estimated to last until 2H24 and 1Q25. Tracking the recovery of the semiconductor industry and with the resumption of capex activities, we expect QES’ orders to trend higher. We note that most of the orderbook delivery should take place in 2H24, given the expected ramp-up of volume loadings as well as the stronger recovery in the semiconductor sector.

Other growth opportunities. QES is looking to continue growing its presence in East Asian countries, especially China, Taiwan, South Korea, and Japan. Meanwhile, its JV with Applied Engineering should allow QES’ manufacturing arm to expand into high-technology semiconductor equipment-making in Penang, while its new manufacturing plant in Batu Kawan should drive growth further in FY25. The group is also exploring options to support an automation project in the medical technology industry, as well as the aerospace market through a collaboration with Malaysia Aerospace Industry Association (MAIA).

Company Report Card

Results highlights. QES reported a 32% YoY earnings contraction to MYR17.3m in FY23, due to a weaker revenue of MYR240.7m (-9% YoY). These were affected by the slowdown in the semiconductor and E&E sectors as a whole, which dragged and deferred the demand for instruments and equipment in FY23.

Balance sheet/cash flow. The group remained in a net cash position of MYR67.6m as at FY23. ROE dropped to 10.4% in FY23 (from 16.2% in FY22) as a result of the contraction in profitability. That said, a recovery is imminent in FY24, backed by a robust orderbook and sector recovery.

Dividends. Management declared a 1 sen DPS for FY23 (FY22: nil), reflecting a c.1.7% dividend yield at its current price. However, assuming a similar payout ratio of 45% and improved profitability, dividends may trend higher in FY24-25F.

Management. QES is helmed by Managing Director Chew Ne Weng, who oversees the group’s overall strategic direction and management. Chew has accumulated over 30 years of experience within the engineering industry. He is aided by Liew Soo Keang, the Executive Director, who is responsible for the distribution division.

Investment Case

Demand-led recovery; trading at an undemanding valuation. With a current forward valuation of 18-22x, QES is trading below the peer average – an undemanding level, for a growing automated test equipment player that has exposure to the front-end equipment segment. We believe its distribution business serves as a counter-cyclical factor against the semiconductor cycle, and is a strong cash flow generator that complements its growing manufacturing business.

Ascribing a target P/E of 25x (discount to the peer average) on FY25F earnings, we believe QES could trade up to MYR0.83. Our earnings growth expectation is premised on the company’s strong orderbook, buoyed by the healthy structural growth trend, its sustainable recurring income, the recovery of the semiconductor sector as well as its diversified market segments, and regional presence in ASEAN countries.

Key downside risks include order fluctuations, labour shortages, and escalation of input costs.

Source: RHB Securities Research - 15 May 2024