D&O to leverage on stronger recovery in 2H20

by SHAZNI ONG / graphic by MZUKRI

D&O Green Technologies Bhd, which provides services for original equipment manufacturers in the auto sector, said it is looking at a stronger second half (2H) performance on expected stronger auto demand from China and Europe.

D&O group MD/CEO Tay Kheng Chiong said 99% of sales for its operating subsidiary Dominant Opto Technologies Sdn Bhd are for export.

“Overall business is very encouraging. In fact, we have received very strong orders since June 2020,” he told The Malaysian Reserve in a brief reply recently.

Last month, D&O’s net profit for the second quarter ended on June 30, 2020 (2Q20), slumped 88.5% year-on-year (YoY) to RM686,000 from RM5.97 million previously.

D&O said its gross profit declined 32.2% to RM21.2 million, attributable mainly to lower revenue and margin erosion on underutilisation of production capacities during the Movement Control Order (MCO) period.

Pre-tax profit declined at a sharper rate of 87.8% to RM990,000 as a result of a slower decline in administrative, research and development expenses and higher foreign-exchange loss as a result of a weaker ringgit against the US dollar.

Revenue for the quarter fell 22.49% YoY to RM89.16 million from RM115.04 million in the same period last year.

D&O said this comes after the company was adversely affected by lower production capacity in the 2Q resulting from the MCO and weaker customer demand due to worldwide Covid-19 lockdown particularly in Europe, the US and India.

For the six cumulative months, D&O saw its net profit decline 61.68% YoY to RM4.6 million from RM12 million, while revenue slipped 9.09% YoY to RM207.35 million from RM228.09 million.

“The positive news here is the company did not suffer a loss despite the turbulence in the 2Q due to Covid-19 worldwide lockdown,” Tay said.

Tay, as disclosed in the 2Q20 report, expects the 2H performance to be significantly better than the first half of the year (1H20).

“In the 2H20, we expect a strong recovery as can be seen in vehicle sales in China, for the fourth consecutive month, up 15% from July 2019.”

“Furthermore, July 2020’s US vehicle sales increased 11% compared to June 2020, Europe’s July 2020 vehicle sales were 18% higher compared to June 2020, coupled with the realisation of prior years design win,” he said.

Tay said in 2H20, capacity expansion is back on track to cope with the productions significant volume ramp-up.

He said the group embarked on operational automation and efficiency drive to strengthen the group’s profitability.

These efforts would start to show results from 2H20 onwards in the form of margin improvements The Research and Markets “Global and China Automotive Lighting Industry Report 2019-2025” said the global automotive lighting market was worth approximately US$32.8 billion (RM134.81 billion), with a YoY increase of 8.6% in 2018.

“The figure is predicted to reach US$57 billion in 2025, as the demand for intelligent lamps, especially automotive LED lamps picks up,” the report said.

Kenanga Investment Bank Bhd analyst Samuel Tan believes the worst is over for D&O and expects a significantly better 2H20 with subsequent quarters to see continuous quarter-on-quarter growth.

“The group has recovered to full capacity in June and is seeing strong orders owing to the pent-up demand from China’s automotive market, as well as the European automotive market.

“China being the first to curb the Covid-19 spread has staged a V-shaped recovery in automotive sales and has also marked its fourth consecutive monthly growth as sales rose 16.4% YoY in July, raising expectations that the slump in auto sales could be ending.

“Over in Europe, car sales have also displayed encouraging recovery coming off the low of -76% YoY in April to -22% YoY in June, thanks to the lifting of restrictions and attractive rebates,” he said.

Tan noted that both regions are experiencing increasing demand for electric vehicles (EV), in line with government policies to reduce carbon emission.

“LED per vehicle is expected to increase as car markers emphasise more on EV and driverless vehicles.

“As one of the pioneers of smart RGB, D&O is well-positioned to reap the benefits as car makers adopt such technology.

“Smart RGB allows for local dimming which results in better contrast and lower power consumption. This works in favour of EV which are dependent on battery for its driving range,” he said.

The firm which maintained its ‘Outperform’ call with a higher target price of RM1.20 based on higher 25.3 times financial year 2021 estimates, which is in line with its three-year mean to reflect improving prospects ahead as the worst quarter is over.

“Being a renowned brand name in full range automotive LED, we believe D&O is a prime proxy for the potential recovery in the automotive market,” Tan said.


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