This article first appeared in Capital, The Edge Malaysia Weekly on September 12, 2022 - September 18, 2022

Target price: RM4.13 OUTPERFORM

PUBLICINVEST RESEARCH

(SEPT 6): The group is expecting to see FY23 (ending June 30) sales growth coming from (i) fibre transceiver modules; (ii) high power LED package for optical communication, automotive and industrial segments; and (iii) system-on-modules (SOM). Following the recent selldown, the stock is now offering an attractive dividend yield of 3.8% (annual dividend payout: >80%) and is currently trading closer to -1 standard deviation long-term average at 23 times earnings. We maintain our “outperform” call and target price, based on 35 times FY23 EPS.

The group finished FY22 with sales of RM1.5 billion, up 8.3% year on year. The radio frequency (RF) components segment dominated group sales, making up 61%, followed by optoelectronics (32%) and generic (7%). The smartphone segment, which delivered a 10% sales growth in FY22, is expected to see stagnant growth in FY23 due to the slowdown in smartphone demand. More complicated products are lining up for FY24. The RF segment is expected to break RM1 billion in sales over the next two years.

Meanwhile, the optical communication segment is expected to see strong growth in FY23 on the back of mass commercialisation of new 100G Fibre Transceiver Module at its P21 plant by year end. In the auto segment, two SOM lines have been added at the P34 plant and 1 SOM line at the P55 plant despite continuously facing material constraints. The P30 plant is already fully utilised while the P55 plant is almost running at full capacity. To note, a single SOM assembly line has the potential of generating up to RM10 million in revenue annually. The group plans to set up another 10 SOM lines at the P34 plant in the next 18 months to ride the robust demand in automotive and industrial segments. In short, FY23 is expected to see better sales performance with solid margins.

FY22 capital expenditure (capex) was RM129 million compared with FY21’s RM99 million. The allocated capex for FY23 is around RM100 million to RM150 million. Meanwhile, the new joint venture with China Fortune Tech Capital is on track with groundworks starting to take place on an 11.5-acre industrial land in Yiwu, Zhejiang, China. The facilities are expected to see commercial production by 2H23.

Target price: RM1.70 ADD

CGS-CIMB SECURITIES RESEARCH (SEPT 5): We retain our “add” rating and target price. Potential rerating catalysts include a healthy three-year core EPS CAGR (FY21-24F) of 12.8%. Key downside risks: weaker-than-expected pharma sales and higher-than-expected input costs.

Consumer healthcare sales held up nicely in 1H22 and into July and August, in line with our expectations. Ethical sales may taper half on half in 2H22, buffered by some export recovery. Cost increases will be partly passed on to the private and public sectors.

While prices of active pharmaceutical ingredients have somewhat stabilised, Duopharma expects about 1 to 2 percentage points dilution to its gross profit (GP) margin from higher input costs if the RM/US$ remains weak in the coming quarters. Nonetheless, cost increases will be partially passed on to the private and public sectors.

We believe our projection for the GP margin to contract from 1H22’s 44.2% to 41.3% for FY22 already sufficiently reflects the impact of potential input cost pressures and higher mix of insulin sales to the government (lower margin) in 2H22.

Target price: RM1.70 OUTPERFORM

KENANGA INVESTMENT BANK RESEARCH (SEPT 6): KGB surprised the market with a huge non-turnkey job win worth RM330 million from a German customer for a new wafer fabrication plant in Kulim. The job entails the supply of ultra-high purity gas delivery systems for both bulk gas and speciality gas. The new win brings order replenishment to a new high of RM1.28 billion, surpassing our expectation.

The current order book has now swelled to RM1.87 billion, which provides very solid earnings visibility for FY22 and FY23. We raise our FY23 core net profit forecast by 5%, leading to a higher target price from RM1.60 previously, on FY23 forecast PER of 23 times (in line with peers’ forward average).

We continue to like KGB for its unique proxy to the front-end semiconductor space, strong track record that continues to attract large multinational companies as customers and venture into the industrial gas segment, which has high barriers to entry and very lucrative margins. Risks to our call include slower revenue recognition due to Covid-19 resurgence, a downturn in semiconductor sales and delay in liquid carbon dioxide ramp up.

Target price: 61 sen HOLD

HONG LEONG INVESTMENT BANK RESEARCH (SEPT 5): The overall parcel volume handled by the industry has shrunk 30% post-pandemic, attributed to a shift in consumer purchasing trends as well as waning consumer sentiment. E-commerce players increasingly insourcing their logistics operations have also led to a decline in PosM’s parcel volume, as evident in the recent quarters.

To mitigate this impact, the group will focus on improving overall parcel yield by altering customer mix, lowering transport costs, as well as engaging with regulators to impose a price floor and check mechanisms to monitor delivery masking. We understand that the parcel yield has improved by more than 5% thus far, falling slightly below its initial target to improve by 7%.

While PosM managed to achieve breakeven in 2Q22, we prefer to err on the side of caution and maintain our “hold” call as we reckon the intense competition in the last-mile delivery space could potentially weigh on its profitability. Our target price is unchanged based on a price-to-book multiple of 0.65 times on FY23 book value per share forecast of 94 sen.

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