The bank has maintained an ‘Outperform’ call with an unchanged TP of RM6.36 based on 40 times FY23 EPS 

by S BIRRUNTHA / pic source: do.com.my

PUBLIC Investment Bank Bhd (PublicInvest) has reiterated its upbeat view on D&O Green Technologies Bhd’s prospects following the latter’s fourth quarter ended Dec 31, 2021 (4Q21) financial results. 

Its analyst Chong Hoe Leong stated since early 2022, D&O Green Technologies’ share has declined by 19% year-to-date in tandem with the global sell-off across the technology sector due to heightening geopolitical concerns and pressures from multiple US rate hikes. 

Thus D&O Green Technologies’ valuation has become more appealing with the stock now trading at a forward price-earnings ratio of only 29 times. 

“The group saw a strong increase of 43% year-on-year growth of the design-in segment (an initial success, where customers consider designs of Dominant Opto Technologies Sdn Bhd’s parts) last year. It normally takes one to three years before conversion into business wins purchase orders. 

“As every automaker is rushing into the electric vehicle space and aiming to be ahead of the curve, we think the duration for contract deliveries could accelerate in the coming years,” Chong wrote in a report on D&O Green Technologies yesterday. 

Chong also highlighted that D&O Green Technologies has no single source dependency on raw material suppliers and it has stocked up more input materials over the last three months to mitigate the supply disruption issue ahead of increasing new capacity production. 

He added D&O Green Technologies’ management has reassured that raw materials are currently well managed as they have sufficient supply that can last for one and a half to three months with five to ten suppliers for each material, namely, wafer, leadframe, phosphor, silicone gel, resin and hardener. 

“In terms of material costs, there is little change as they have more suppliers with competitive pricing,” he added. 

As such, Chong noted D&O Green Technologies remains one of PublicInvest’s top picks for exposure to the technology sector given robust growth in the automotive LED industry. 

The bank has maintained an ‘Outperform’ call with an unchanged target price (TP) of RM6.36 based on 40 times financial year 2023 (FY23) earnings per share (EPS). 

Chong said the group is forecasting capacity growth of 20% to 30% in 2022. D&O Green Technologies’ management has allocated capital expenditure of RM150 million for FY22, mainly to cater for new production lines at Plant 2. 

He added the company is in the process of installing new machineries with commencement of LED production taking place in 2Q22. 

“Given the increased capacity, we expect to see strong earnings momentum to persist in the first half of 2022. We are confident of seeing another double-digit earnings growth for FY22,” he said. 

Based on the timeline, the 25,000 sq m Plant 2, which can potentially generate at least RM1 billion annual revenue, is expected to be fully utilised by 2025 and it has a capacity of producing at least 400m pieces of LED per month. 

The construction for the 10-storey 35,000 sq m manufacturing Plant 3, which costs about RM200 million, is set to kick-start in 4Q22 and be ready for commercial operation by the end of 2024. 

D&O Green Technologies’ net profit surged 119% to RM30.32 million in 4Q21 from RM13.85 million a year ago, underpinned by an increased demand and recovery in the automotive industry, according to its filing to Bursa Malaysia Bhd. 

The automotive LED maker’s revenue for the quarter grew 39% to RM209.57 million from RM150.47 million in 4Q20, as its automotive sector recorded a 41% revenue growth amid increased demand from commercialisation of new business wins and a general recovery in the automotive industry. 

For the full year, D&O Green Technologies’ net profit climbed 42% to RM49.65 million from RM34.87 million in the preceding year, while revenue rose 14% to RM575.78 million from RM504.31 million. 

D&O Green Technologies is poised to achieve sustainable earnings growth in 2021 given its comprehensive product portfolio and traction gained with Tier 1 automotive customers.