HLIB: Strong growth for Kobay after record-breaking net profit

by ANIS HAZIM / graphic by TMR

KOBAY Technology Bhd beat analysts’ expectations with its record-breaking net profit of RM14 million in the second quarter of 2022 (2Q22) which lifted its net profit for the first half of 2022 (1H22) to RM24 million. 

The group’s all-time high quarterly result exceeded Hong Leong Investment Bank (HLIB) Research’s expectation accounting for 53% of its full-year forecast. 

“This outperformance was mainly due to stronger-than-expected margin in manufacturing while the solar frame project has yet to commence,” HLIB Research’s analysts Tan J Young and Syifaa’ Mahsuri Ismail said in a note. 

Quarterly, its top-line strengthened by 40% to RM93 million on higher contributions from manufacturing and property development; and consolidation of the pharmacy business. 

“Despite the higher depreciation and amortisation, and effective tax rate, the core net profit gained 50% to RM14 million in 2Q22, thanks to stronger margin,” the analysts said. 

The analysts noted that the group’s 1H22 one-off items include amortisation of deferred income on government grants, properties, plant and equipment disposal gain, fair value (FV) gain on the financial instrument, foreign exchange loss and FV gain on other investments. 

Year-on-year, Kobay’s sales leapt by 2.6 times attributable to higher contributions from manufacturing and property developments, and consolidation of the pharmacy business which swelled the group’s bottom line by 2.5 times. 

For year-to-date, the group’s turnover more than doubled to top RM159 million as the expansion in manufacturing and the consolidation of pharmacy business were sufficient to offset the decline in property developments. 

“In turn, core earnings gained 2.2 times to RM24 million,” they noted. 

Concurrently, Malaysia remains the largest top-line contributor for 1H22 with 76%, followed by the US (8%), Singapore (8%), Hong Kong (5%) and others with 4%. 

“Manufacturing is expected to grow at a strong pace riding on the current chip shortage. In addition, Kobay is still setting up a new plant to cater for solar aluminium frame production,” they added. 

According to the analysts, the new plant is expected to commence operation beginning 4Q22, while the property development segment is expected to contribute more as the economic condition normalises. 

“We expect the new income stream from the pharmaceutical segment to start contributing positively from 1Q22. 

“Note that the newly acquired Avelon Group (70%-owned) in August 2021 comes with a profit guarantee of RM25.5 million in the next three years,” they continued. 

Meanwhile, HLIB Research has raised the stock’s financial year 2022 (FY22) to FY24 profit after tax after minority interest forecasts by 5%, 5% and 3%, respectively. 

“We reiterate ‘Buy’ but with a lower target price of RM7.88 after factoring in the dilution effect from the private placement exercise,” said the analysts further. 

Due to its diverse business structure, HLIB Research values Kobay using the sum of parts valuation methodology with a manufacturing division valued based on 45 times of FY23 earnings per share (EPS). 

“This multiple is at discount to what we ascribed to its peers under our coverage — property development business is valued using FY21 net book value and pharmaceutical business is appraised based on 25 times of FY23 EPS, in line with industry peers,” the analysts said.