Greatec Off To A Slow Start But Still On Course: Maybank IB

Despite a sequentially weaker quarter, GREATEC’s 1Q23 core NP and GP margins came in stronger YoY in the absence of supply chain issues that plagued its 1Q22 performance. Maybank IB retains its forecasts for FY23E but has trimmed estimates for FY24/25E by 11-12%.

Results below expectations
Ex-EIs totaling MYR8.9m (includes lumpy share grant expenses/unrealised forex losses of MYR3.7m/MYR2.4m), GREATEC registered a 1Q23 core net profit of MYR36.8m (+15% YoY, -9% QoQ) – this was slightly below expectations at just 20%/19% of ours/the street’s full-year forecasts. Positively, group turnover increased 11% YoY to MYR114m, underpinned by stronger revenue recognition for its production line system (PLS) contracts in the EV segment (accounted for 31% of 1Q23 revenue vs. 24% in 1Q22). EBIT margins dragged by overheads, impairments

Despite a 6-ppts YoY improvement in GP margins (40% in 1Q23 vs. 34% in 1Q22), EBIT margins dragged 4.1 ppts as the group had to contend with: (i) higher employee-related compensation/benefit expenditure (c.10% of COGS vs. 7-8% previously) of MYR3m from an increase in headcount/LTIP expenses, (ii) higher utility overheads from the revised ICPT tariff (eff. 01 Jan) and logistics-related expenses from PLS delivery in the quarter, and (iii) a MYR2m net loss on impairment of contract assets and trade receivables from contract reclassification (likely to be reversed in 2Q23).

Healthy orderbook; trimming FY24-25E estimates
Notwithstanding the challenging operating environment, GREATEC’s long-term outlook remains relatively bright, underpinned by exposure to USbased FirstSolar and a diversified EV customer base – both direct beneficiaries of the US Inflation Reduction Act’s emphasis on clean energy.

Despite securing just MYR44m in order book wins (current outstanding O/B at MYR650m) for 1Q23 vs. MYR800m targeted for the year, mgmt is confident of securing a bulk of the contracts in 2H23. As such, Maybank IB said it retains estimates for FY23 but trim FY24/25E by 11%/12% to account for (i) slightly lower non-PV/EV PLS revenue projections and (ii) higher fixed cost pressures post-operational commencement of its Batu Kawan IV plant by year-end (per mgmt’s c.50% utilisation guidance)

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