KUALA LUMPUR: QES Group Bhd is expected to ride on the semiconductor industry growth and has attractive growth prospects, a strong presence in the ASEAN region and stable recurring income.

Mercury Securities Sdn Bhd said QES Group has a diversified base of more than 3,800 customers across the ASEAN region, primarily from the semiconductor, electrical and electronics (E&E), metal and automotive sectors.

The company's revenue stream is also well-diversified, where each customer does not contribute more than 10 per cent of total revenue.

Moving forward, the company plans to expand its regional presence in China via QES Hong Kong.

Mercury Securities noted that QES Group had completed the renovation of its Hicom-Glenmarie's new factory at Shah Alam, running at a 50 per cent utilisation rate.

"We expect the factory to be fully utilised by the end of the financial year (FY) 2022," the research firm said in a recent note.

The new factory has an overall space of 81,000 sq ft, an increase from 39,000 sq ft, where 35,000 sq ft is allocated for manufacturing.

With the increased space, the company can increase its capacity from 50-80 machines to approximately 80-100 machines a year.

The company is also building another new factory in Batu Kawan, Penang, to leverage Penang's existing matured supply chain.

The factory will have a manufacturing space of approximately 100,000 sq ft to house a combined QES Mechatronics, QES Vision, AETM (a joint venture between US-based Applied Engineering Inc, which holds 70 per cent and QES Group 30 per cent), and QES Distribution Penang operations.

Construction of the factory is expected to begin in the second half (2H) of 2022 onwards.

Mercury Securities also noted that QES Group has a consistent annual recurring income of approximately RM40 million via the maintenance and service of large equipment installed base, which contributes approximately 25 per cent of group revenue.

"The cash balance remains strong above RM79.4 million as of 31 December 2021, consistent net cash since FY20," the research firm said.

QES Group is currently managed by its managing director Chew Ne Weng who has more than 30 years of experience in the engineering industry and is responsible for its success.

Mercury Securities noted that the company has a long-standing management team with more than ten years of experience in key operational and technical functions.

"We recommend a Buy call on QES Group with a target price of RM0.66 based on FY23 earnings per share (EPS) of 3.3 sen and peers' average price-to-earnings (PE) of 20.0x," the research firm noted.

Key risks include material supply chain disruption and slower-than-expected contract flows.