D&O Green Technologies (D&O)’s 1HFY23 net profit of RM1.6m disappointed, as its 2QFY23 dipped to a new quarterly low in the last eight years.
“D&O’s 1HFY23 revenue declined by 10%, primarily due to sluggish demand amid an inventory glut,” said Kenanga Research (Kenanga) in the recent Results Note.
Customers have become more hesitant to aggressively replenish orders as was the case in the past, aligning with the trend among tech players shifting from a just-in-case to just-in-time inventory system.
Despite some QoQ improvement where revenue inched upwards 2.4%, it failed to offset the quicker rise in operating cost which resulted from its capacity expansion and higher utility cost.
“As such, gross profit margin remained subdued at 16.0%, which led to an overall 97.4% decline in net profit for 1HFY23,” said the research house.
With growing uncertainty surrounding the global economy coupled with underwhelming recovery from China’s reopening, consumers are likely to think twice before splurging on big-ticket items.
“This has led to the group facing order commitments well below the initial rosy projections conveyed by customers. While the group anticipates some improvements in 2HFY24, we believe the rate of recovery will likely be unexciting,” said Kenanga.
They are cautious on D&O over the immediate term owing to the on-going inventory adjustments that may be prolonged and resulting in significant earnings erosion.
Having said that, Kenanga acknowledges D&O’s presence in the high-growth automotive LED space, its penetration into the electric vehicle market, and its ventures into next-generation smart LEDs that fetch high margins.
Kenanga maintains the Underperform rating and the Target Price of RM2.30.
Risks to Kenanga’s call include a strong-than-expected recovery in the global economy, especially in China, the inventory adjustment cycle
ending sooner than expected, and contributions from its smart LEDs coming in sooner and stronger than expected.
