Sculpturing Remarkable Prospects
As an OEM player specialising in automobile and medical cables, Scomnet is also a unique Malaysian proxy to exports of critical medical components for leading global medical device distributors. Scomnet is poised to deliver a supercharged earnings growth trajectory through 2022 with increased capacity and imminent commercial launch of numerous potential blockbuster products (FDA-approved) for its broad spectrum of key clients. Maintain BUY with a higher target price of RM2.38
• An emerging global healthcare proxy. Supercomnet Technologies (Scomnet) is involved in the medical equipment business principally through its subsidiary Supercomal Medical Products (SMP), which specialises in the manufacturing of OEM medical cables used in endoscopes and parts of endoscopy accessories, connectors, medical tubes and other medical devices. SMP supplies to several notorious healthcare vendors such as the New York Stock Exchange-listed Edwards Lifesciences, Denmark-based Ambu Medical, Mermaid Medicals and Switzerland-based Plass Rescue Technologies.
• Stellar earnings enhancement on SMP’s medical exposure. Since the acquisition of the remaining 80% stake of its medical subsidiary SMP in early-18, Scomnet has recorded 11 consecutive quarters of yoy core earnings growth, and is poised to deliver stupefying growth the on the back of commercial production and imminent launches of various new products in the coming few years. The resilient growth will also be supported by positive long-term drivers such as the impending acceleration of healthcare equipment demand in the US and Europe which SMP’s key clients are serving. Note that Scomnet recorded an impressive 5-
year net profit CAGR growth of 50% in 2015-20.
• Pedalling for robust growth trajectory from the automobile segment. Scomnet is also involved in the manufacturing and sub-assembly of electrical and automobile cable components, including role cables for wire harnesses used in Proton’s and Perodua’s
vehicles. The company has also secured a French-based auto company, Groupe PSA, and will fully localise the wire harness and fuel tank production of several car models for the Asian Pacific market in its Malaysian auto manufacturing hub. This is expected to kick-start in 4Q21 and contribute positively to the group’s earnings in subsequent years.
• Imminent mainboard listing could catalyse a potential valuation re-rating. Scomnet is also preparing for its mainboard transfer which is expected to complete in 2H22. This will further strengthen its unique proposition as an emerging healthcare proxy.
• Embarking for better growth proposition in 2022-23, major catalysts abound to fuel supercharged growth. Scomnet is poised for a new leg of growth which will anchor a robust two-year net profit CAGR of 39% in 2022-23. This will be driven by: a) commercial launches of numerous new FDA-approved products (rotational thrombectomy devices, oximetry sensors, wound occluders and insertion tubes) which will begin production from 4Q21 onwards; b) soaring demand for COVID-19-related medical devices; c) positive contributions from the newly-secured US medical client; d) commencement of fuel tank production for automobile client Naza PSA from 4Q21 onwards; and e) near-term capacity expansion to fulfil explosive demand for the medical segment’s products.
• Setting the course for a solid 2H21-2022 recovery post-pandemic. With the group receiving approval from the Ministry of International Trade and Industry (MITI) to operate at 100% workforce from 1 Sep 21 onwards, and with the issues of spiking raw material costs as well as freight expenses in 1Q21 having been largely resolved, we deem that Scomnet’s earnings are on track for a robust recovery in 2H21. The strong recovery will be mainly supported by subsidiary SMP’s resilient orderbook which will last until 1H22. Management also guided that SMP’s existing orders for 2021 will see a 30% yoy growth.
• SMP still the main demand driver. Rising health concerns coupled with the increasing adoption of advanced technologies in the field of medical equipment have been stimulating market revenue, and are poised to drive demand of SMP’s medical cables in the coming years. While SMP made up about 54% of Scomnet’s revenue in 2019, we expect contribution from SMP to grow by leaps and bounds in 2022-23, mainly driven by commercial launching of several new products. The medical device segment is expected to contribute 70-75% of group revenue and the remaining 25-30% will come from the automobile and IT segment in 2022-23.
• SAC secures new client – Naza PSA. The emergence of SAC’s latest key customer – Groupe PSA (French-based) is going to enhance the growth of Scomnet’s automobile segment. To recall, PSA and Naza formed a joint venture to officially establish their first manufacturing hub in ASEAN at Gurun, Kedah. Scomnet and PSA signed an agreement which allows SAC to supply wire harnessing and fuel tanks for two car models – Peugeot 3008 & Peugeot 5008 in the ASEAN region. With PSA’s equipment and machineries, as well as technical expertise (engineers) arriving from Wuhan in 4Q21, we expect the localised production of fuel tanks for Naza PSA to commence in Dec 21 and contribute RM4m- 6m/quarter to Scomnet from 2022 onwards, with higher revenue contributions in subsequent years.
• Maintain BUY with a higher target price of RM2.38. We rolled over our valuations to 2022 and pegged our target price to 36x 2022F PE, its 3-year mean. We also assumed a full conversion of existing warrants in our valuations, and took into account the resilient 2022 growth and introduced 2023 financials. We forecast Scomnet to deliver an impressive 3-year net profit CAGR of 39% in 2021-23.