Still attractive despite the setbacks; maintain BUY

1Q22 results were below expectations as cost overruns from Covid-related
subcontracting and a less-than-favourable project mix adversely impacted
margins. We have reduced our FY22E CNP estimate by 4% and lowered our
valuation peg to the LT mean of 32x FY23E PER (from 40x FY23 PER, at
+0.5SD previously). Our TP is revised to MYR5.25 (-21%) but maintain a BUY
rating for its solid exposure to key growth industries (solar, e-mobility, life
sciences) and undemanding valuations (share price has declined 50% YTD).

Results miss expectations

Excluding exceptional items amounting to MYR3.0m, GREATEC’s 1Q22 core
net profit came in at MYR32.8m (-22% YoY, +17% QoQ). Results were below
expectations, at just 19% of our/the street’s full year CNP estimates.
Despite an improvement in 1Q22 group turnover (+7% YoY, +36% QoQ),
inflated costs posed a drag on EBIT margins (-20 ppts YoY, -11 ppts QoQ).

Cost overruns gnaw at EBIT margins

1Q22 margins were abnormally impacted from: (i) an increase in one-off
subcontract charges to third parties as operations were disrupted by a
Covid outbreak that affected 66 employees, (ii) increased costs as projects
billed in the quarter were predominantly fabrication/assembly-related
(vs. 1Q21/4Q21’s favourable mix of installation/commissioning) and (iii)
lower unused warranty provisions of just MYR1m (1Q21/4Q21: c.MYR9m).
Despite the setbacks, mgmt is still confident of achieving its FY22 NP
margin target of >30% as sequential quarters are expected to fare better.

Moderating valuation peg in-line with sector

GREATEC’s outstanding orderbook of MYR467m (as of 09 May) remains
healthy and it targets to win a further MYR461m for the remainder of FY22.
However, we lower our FY22E earnings estimates by c.4% to account for
potential PLS segment revenue loss from further supply chain disruptions
(risk is well-flagged) but maintain our forecasts for FY23/24E. We have
also turned cautious on the sector’s valuation premiums given the
suppressive effect of the Fed’s aggressive monetary tightening, with our
TP now pegged to 32x FY23 PER, at the LT mean (from +0.5SD to the Mean).
Our BUY rating is maintained as valuations remain undemanding.