D&O Green Technologies seen offering exciting long-term growth prospects

TheEdge Thu, Jun 13, 2019 10:47am - 4 years View Original


D&O Green Technologies Bhd
(June 12, 58.5 sen)
Maintain market perform with a lower target price (TP) of 60 sen:
We came away from a management meeting unexcited about D&O Green Technologies Bhd’s 2019 outlook.

 
We believe the adverse effect of the Worldwide Harmonised Light Vehicles Test Procedure regulation on the European passenger vehicle sales has mostly subsided. In addition, we believe the group has been gaining market share in the automotive LED space lately, thanks in part to new interior applications — backlight unit (BLU) display used for infotainment systems. We are sanguine that the group will post a commendable improvement in the second quarter of 2019 (2Q19) earnings year-on-year (y-o-y) and quarter-on-quarter (q-o-q).

The management has toned down its revenue growth guidance for financial year 2019 (FY19) from 10% to 15% to flat (in the worst-case scenario), as the second half of 2019 outlook remains ambiguous amid intensifying US-China trade war, which could affect consumer sentiment and affordability of passenger vehicles.

Nevertheless, we still expect to see an uptick in FY19 profit on a slight improvement in net profit margin, underpinned by better operational efficiency through lower headcount and fully automating the visual inspection process.

The group targets to shift its office to its new plant by November post-completion in 2Q19 to 3Q19, and subsequently convert the existing office to a manufacturing facility. However, the management did not provide any timeline as to when the group would expand production capacity in the existing plant, and any expansion will be on an as-needed basis. Meanwhile, the remaining floor space in the new plant will be reserved for capacity expansion in one to two years’ time. Fortunately, the incremental depreciation for the new plant is expected to be minimal at less than RM400,000 in FY19 and RM1.8 million to RM2.4 million in FY20, as capital-intensive machineries/equipment will not be in place in the first one to two years as mentioned.

We trim FY19 estimates (FY19E) to FY20E net profit by 8% to 12% to RM41.5 million to RM50.2 million as we tone down our earlier bullish automotive LED growth assumptions from 7% to 16% to 4% to 11% to account for cloudier global economic outlook amid heightened trade war tension.

Additionally, we have lowered our FY19E to FY20E gross profit margin assumptions from 29% to 30% to 28.5% to 29.5% (still higher than 28.3% in FY18) to reflect heftier manufacturing overheads after about 30% capacity expansion in late-FY18.

Maintain “market perform” with a lower TP of 60 sen based on FY19E price-earnings ratio of 18 times, in line with the valuation of its German competitor — Osram. While D&O offers exciting long-term growth prospects, we believe the trade war could affect consumer sentiment and spending on cars, at least in the short- to medium-term.

Valuation also appears unattractive at current price levels. Risks to our call include: i) disruption of components supply; ii) replacement/obsolescence of LED technology; iii) sharp currency fluctuations; and iv) adverse foreign labour policy. — Kenanga Research, June 12

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