Genetec is well positioned to boom from EVs and ES demand

by ANIS HAZIM / pic source:

GENETEC Technology Bhd is well-positioned to benefit from the growing demand for electric vehicles (EVs) and stationary energy storage (ES) solutions via its major customers in these sectors. 

Thus, CGS-CIMB Securities Sdn Bhd have raised the company’s target price to RM50 due to its undemanding valuation, robust earnings prospects amidst a rise in institutional funds’ holdings as well as narrowing valuation discount versus EV supply chain peers, and Genetec’s potential interest as an environmental, social and governance (ESG)-related play. 

“We initiate coverage on Genetec with an ‘Add’ and target price of RM50, based on 40 times calendar year (CY23F) and price-to-earnings (P/E), to one standard deviation of Malaysia’s Automated Test Equipment sector mean,” its analysts Walter AW and Mohd Shanaz Noor Azam wrote in a report yesterday. 

Genetec specialises in providing automation solutions for the downstream battery cell manufacturing process. 

From February 2021, Genetec has received a total of RM204.6 million in orders and 70% are from the EV and battery segments. 

“Its current orders in hand are worth 124% more than its average revenue of RM91.5 million for the financial year 2019 (FY19)-FY21,” the broker stated. 

The analysts also think the largest EV maker, Tesla Inc, could potentially be a Genetec customer as global demand for EVs is rising.

“Being the largest EV manufacturer globally and in the US, Tesla has the production volumes to justify usage of automation solutions in its production. Also, Genetec’s revenue contributions from the US has grown to 30% in FY21.

Note that Tesla’s manufacturing operations are currently located in the US,” the analysts stated. Genetec disclosed in its FY21 annual report that a new undisclosed client has become its third-largest customer by revenue contribution (RM28.2 million) compared to zero revenue contribution in FY20.

In addition, Tesla has specifically highlighted plans to further expand its production to make more affordable EVs and ES solutions in order to achieve the transition towards sustainable energy. 

CGS-CIMB projects Genetec to post a three-year core net profit compound annual growth rate of 235% (CY20-CY23F).

“This is due to the more orders from its EV customers, more contract wins from existing automotive clients (EV and non-EV related), and higher economies of scale,” they added.

CGS-CIMB has yet to account for any orders from other EV-based clients, more orders beyond the current job scope for its key EV client, and potential contracts from new businesses. 

“With its undemanding valuation, we believe Genetec should rerate from expected robust earnings, rise in institutional funds’ holdings, narrowing valuation discount versus EV supply chain peers, and potential interest as an ESG-related play,” the analysts said. 

The downside risks for Genetec would be the cancellation of major orders, losing Tesla as a client, and delays in customers’ growth plans. 

Genetec rose RM3.62 or 10% to RM39.50 at close of trade yesterday.