The following are key takeaways from Supercomnet's 3Q24 results briefing:

3Q24 Results Recap

Supercomnet’s 3Q24 performance was impacted by a forex loss of RM3.2mn (from USD cash holdings) and weaker sales in the medical segment due to downtime (2 months) on certain medical reusable cables production lines for capacity expansion. Additionally, the automotive segment remained loss-making due to weak orders from Stellantis. As a result, 3Q24 net profit decreased to 3Q24, compared to RM8.4mn in 2Q24.

Positively, we have gathered that the expansion of the reusable cables has been completed and the contribution is expected to resume in 4Q24 (approximately RM1mn to net pProfit).

Medical Segment to Drive Growth

Global sales of medical devices are expected to grow at a CAGR of 7%, reaching USD964.9bn in 2030. With this, we believe Scomnet’s shift towards high valueadded products and its product pipelines would bode well for the group. As at 9M24, the medical segment remained the key contributor, accounting for 79% of total sales with revenue of approximately RM88.3mn (+25% YoY), driven by a notable pickup in demand for single-use endoscopy.

In 2025, we believe that contributions from key customers such as A (38% of total sales) and E (38% of total sales) would increase by at least 10% each, driven by new products such as smart cables (from 1Q25) and EEG cables (from 2H25).

Meanwhile, the group is still waiting for customer M to resume orders of the D-Clot device. As for the customer N, management shared that group has received FDA approval for this device but the customer will need to resubmit the nanoshells (residual value test) to FDA. As such, we believe the group would be able to begin mass production in 2H25. Regarding IHS, the FDA has already approved the product, but there are still some issues with the indicator. Overall, we believe that the mass production of the IHS product would begin by 3Q25.

Hopeful About the Recovery of the Automotive Segment

YTD, sales from Scomnet’s automotive segment plunged to c. RM3.3mn in 9M24 against RM11.8mn in 9M23. We attribute the weak auto sales to: i) restructuring of production lines of Stellantis and ii) weak demand of Peugeot cars in the Asia Pacific region.

Given the weak orders, the group is working to diversify its customer base by acquiring new clients, instead of heavily relying on a single customer. Currently, Scomnet is still in talks with a European automotive players to produce wire harnesses for Chrysler’s models in the US market and another potential new big customer, We understand that the audit conducted by the potential new customer has been very positive. If successful, we expect maiden contribution by 2Q25. As such, we expect FY25 automotive sales to rebound strongly.

Forecasts

Maintain Our FY24-26 Earnings Forecasts.

Valuation

We remain optimistic about Supercomnet, supported by its ongoing shift to high-value-added products and accelerated growth from the expansion of its medical and automotive segments. We reiterate our Buy recommendation on the stock with an unchanged TP of RM1.73/share, based on 30x CY25 EPS.

Source: TA Research - 29 Nov 2024