We are sanguine about Supercomnet’s prospects, expecting its net profit to increase by 31.9% in FY24, driven by rebound in the automotive segment and higher contribution from the medical segment. Contributions from key customers, Ambu and Edward, are set to grow by 8-10% YoY while maiden contribution from IHS and customer N will bode well for the group. No change to our earnings estimates. Maintain Buy with a TP of RM1.46/share.

Review of FY23

Supercomnet’s FY23 net profit declined 9.6% to RM29.7mn, in tandem with weaker revenue of 12.8% to RM138.1mn. We attribute the weaker results to lower revenue from the industrial and automotive segments. In addition, net profit was impacted by higher electricity tariffs, share-based compensation for ESOS (RM1.6mn) and RM1mn one-off expense related to main market transfer.

More importantly, profit have been on uptrends since 1Q23 (Figure 1) due to higher orders from the medical segment, driven by resurgent demand for endoscopy video cables. We believe the recovery would continue, leading to revenue and profit growth of 27.7% and 31.9% in FY24. Note that 4Q23 performance improved further by 8.1% QoQ to RM8.0mn as revenue grew 7.1% to RM34.8mn.

Medical Segment the Key Driver

We expect the medical segment to continue to grow in 2024 as the group is pursuing opportunities in expanding sales to existing customers, progressing towards commercial production of new products and shifting to producing whole device to enhance the group’s margins. Key customers such as Edward (38% of 4Q23 revenue) and Ambu (36% of 4Q23 revenue) are expected to increase their orders. For Edward, we expect sales to increase by 8.2% in FY24, driven by smart cables. As for Ambu, the sales recovery in 4Q23 to RM12.5mn revenue (orders back to 95-98% of pandemic levels) will likely persist in FY24 while Ambu is ramping up its Mexico Plant (North and South America market).

Also, contribution from IHS would likely begin in 2H24. The current issue with the flow controller has been resolved with promising results approved by supplier and FDA. Note that Supercomnet has received FDA approval for 4 of its IHS products (Intravenous IV controller, fixed rate tubing, subcutaneous needle set and OneSett subcutaneous administration set). On the flip side, orders from Mermaid would be halted in April 2024 and would only resume by September 2024 when the internal dispute is settled. The impact to Supercomnet is insignificant as Mermaid contributed less than 5% of FY22/23 revenue.

Huge Growth Potential From Customer N

We understand that the mass production of Nanomedicine Therapy Device (treatment for throat, brain, lung and prostate cancer), using catheter technology will tentatively begin in 3Q24. To recap, US based customer N has developed a new class of nanoshells that can convert light into heat, thermally destroying solid tumours without damaging adjacent healthy tissues. FDA has already verified all final 60 clinical trials (100% success rate), implying customer N is close to obtain FDA’s approval soon. We gather that the only improvement needed is a softer tubing. No additional clinical trials are needed, except doing a trial in technical lab to ensure the efficiency of smooth blood flow. In our opinion, this potential new contract from customer N would be the engine of growth to fuel Supercomnet’s future profitability.

Automotive to Fully Recover by Middle of 2Q24

Supercomnet’s automotive segment was hit by low orders from Stellantis, which is undergoing a restructuring process of its production lines. As such, the automotive segment contributed to a mere 2% of revenue in 3Q23 (RM650k) and 4Q23 (RM700k) as compared to 20% (RM7.5mn) and 11% (RM3.7mn) in 1Q23 and 2Q23 respectively. In FY23, the automotive segment contributed about RM12.5mn to revenue and RM250k net profit.

The decline in demand from this segment is temporary and is expected to recover in May 2024 as Stellantis would resume production. In our projections, we expect sales to recover to RM2mn per month from May onwards. Note that Stellantis is entering Malaysia with sizeable investments that could create opportunities worth up to RM5bn for local businesses in the manufacturing and outsourcing sectors. In essence, we believe the expansion of Stellantis in ASEAN (via Gurun, Kedah) will bode well for Scomnet over the long run. Meanwhile, talks are still ongoing between Supercomnet and Chrysler in relation to the supply wire harness for Chrysler models in the US market.

Forecasts

No Change to FY24-26 Earnings Projections.

Valuation

Maintain our Buy recommendation on the stock with an unchanged TP of RM1.46/share based on 32.0x CY24 EPS.

Source: TA Research - 5 Mar 2024