D&O Green Technologies Bhd
(Feb 21, 77.5 sen)
Maintain market perform with an unchanged target price of 75 sen: D&O Green Technologies Bhd’s core profit after tax and minority interest(Patmi) for fourth quarter of financial year 2018 (4QFY18) surged 75% year-on-year (y-o-y) to RM38.2 million, which was within consensus estimates at 98%, but 7% shy of ours. We attribute the slight earnings miss to the Chinese imposition of tariffs on US vehicles and the introduction of the Worldwide Harmonised Light Vehicle Test Procedure emission regulation, both of which affected vehicle sales in the regions during 4QFY18. As a result, FY18 revenue came in short at RM491 million, against our forecast of RM537 million. No dividend was announced during the quarter, as expected.

 
On a y-o-y basis, 4QFY18 revenue climbed 6% on the back of higher automotive light-emitting diode (LED) sales. The segment’s revenue contribution continued to inch up further to 97% from 95% in 4QFY17, which was consistent with the group’s strategy to shun cut-throat competition facing the general LED market (general lighting and LED television) while switching focus to the higher-margin automotive segment. The effort, alongside better operating efficiency, led to a 3.6-percentage-point expansion in gross profit margin to 29.7%. Coupled with lower minority interests arising from an additional acquired stake in Dominant, core Patmi more than doubled to RM14.2 million.

On a quarter-on-quarter basis, 4QFY18 revenue rose 14% on seasonality. Traditionally, 4Q is the strongest quarter as customers increase orders to prepare for higher year end and Chinese New Year demands. Meanwhile, core Patmi jumped by a larger quantum (+40%) due to a 1.3-percentage-point improvement in gross profit margin as well as relatively stagnant research and development expenses and lower overheads.

D&O’s five-year expansion plan with its new 2.41ha land-cum-factory building is still ongoing. Currently, we are conservatively assuming an additional 25%-30% capacity through FY20, which supports our 26%-28% growth forecasts for the automotive segment in FY19-FY20. In terms of product mix, the higher-margin exterior lightings only constituted about 35% of total automotive revenue in FY18. The contribution is expected to progressively increase to 50% in two to three years, anchored by new supply wins from tier-one automotive LED customers, especially in the headlamp space, alongside existing orders of day running light, side signal, position lamp, and rear combination lamp, which are still seeing rapid deployment in new vehicles.

We see no changes in D&O’s forecast FY19 core Patmi as prospects remain intact while introducing forecast FY20 core Patmi of RM69.4 million, premised on automotive-driven revenue growth 26% and a gross profit margin of 28%. Therefore, based on an unchanged forecast FY19 price-earnings ratio of 18 times, in line with the valuation of its German competitor — OSRAM. While D&O offers exciting growth prospects, we believe valuation is stretched at current price level. — Kenanga Research, Feb 21