Despite the delay of contributions from customer I and N as well as issues within customer M, we believe that Supercomnet’s earnings growth would remain intact as 2 of its largest customers, Edward and Ambu, would increase purchase orders in FY24. Meanwhile, we expect the automotive segment to recover strongly in FY24 as the temporary drop in sales was due to the revamp of Stellantis Gurun Plant. In addition, the group is in talk with a European automotive player on sales of wire harness. We cut our FY23/24/25F by 22.2/21.0/21.1% after lowering our sales assumptions by about 23%. Following the earnings revision, we reduce Supercomnet’s TP to RM1.46/share (previously RM1.85). Maintain Buy.

Review of 3Q23

Supercomnet’s 3Q23 PAT dropped 26.7% YoY to RM7.4mn, in tandem with lower revenue of 27.9% to RM32.5mn. The weaker performance was attributed to higher production cost resulted from electricity tariff hikes and lower revenue of about RM6mn each in the automotive (temporary drop as Stellantis revamps plans for Gurun Plant and ASEAN) and industrial segments (prioritize higher-margin opportunities).

Overall, the automotive segment contributed only 2% (vs. 14% in 3Q22) while industrial accounted for 21% (vs. 30% in 3Q22) of 3Q23 revenue. Meanwhile, the medical segment continued to be the key driver, accounting for 77% of 3Q23 revenue as compared to 56% in the 3Q22.

Automotive to Fully Recover by 2Q24

Management shared that 4Q23 automotive contribution would remain flat QoQ but full recovery is expected to happen by either 1Q24 or 2Q24. We understand that Scomnet’s customer, Stellantis is evaluating Gurun’s potential to be a regional hub for battery-electric vehicles (BEVs) for domestic and export markets. In essence, we believe the expansion of Stellantis in ASEAN (via Gurun, Kedah) will bode well for Scomnet.

In addition, Scomnet has been approached by a European automotive player to produce wire harness for Chrysler models in the US market. If successful, the first project is expected to begin in March or April 2024 and contribute around RM10-15mn sales per annum. In our forecast, we estimate that the automotive segment will contribute RM28.2mn (vs. RM12.2mn in FY23F) to sales in FY24.

Medical Segment Sets to Grow Further

Moving into 4Q23, the group is confident that the medical segment contribution will increase by 15-20% QoQ driven by higher sales to Edward (40% of 3Q23 revenue) and recovery in orders from Ambu (29% of 3Q23 revenue). We note that Supercomnet has been chosen by Edwards Lifesciences (market cap of above USD50bn) as the best quality supplier (more than 700 suppliers) and achieved gold status in 2023. Edward will be using more digital smart cable (from analog cable) for its products such as its inbuilt PCB Board somewhere in the middle of 2024. For Ambu, the growth will come from endoscopes, gastroscopes and colonoscope (US FDA approved in Sep-23).

However, we gather that contribution from IHS will be delayed to 2H24 (from November-23 previously). To recap, demand for the IHS project is estimated at 1mn units per month (USD3-3.5 per unit), which will make IHS its top 3 customers moving forward. We understand that Scomnet is still facing issues as both its first FDA-approved supplier and second supplier are unable to meet certain specifications, and suffering high rate of rejection. As such, Scomnet is in the process of finding another supplier or may even do it on its own. Meanwhile, orders from Mermaid will remain at 3k per annum but may jump to as high as 4k per month (if Mermaid internal dispute resolve). As for Customer N, the mass production of Nanomedicine Therapy Device (treatment for brain, throat, lung and prostate cancer) is now slated to begin in 1H24 (previously 4Q23/1Q24) as the product is still undergoing late-stage clinical trials.

All in all, we expect the medical segment’s contribution to increase by 28.8% in FY24F (vs. 2.6% in FY23F) as we expect Edward and Ambu’s contribution to increase by 13% and 18% respectively in 2024.

Forecasts

As 3Q23 results came in below expectations, we slash our FY23/24/25F by 22.2/21.0/21.1% after cutting our sales assumptions by about 23%.

Valuation

Following the earnings revision, our TP is reduced to RM1.46/share (previously RM1.85/share) based on 32.0x CY24 EPS. Maintain Buy.

Source: TA Research - 7 Dec 2023