Preferred proxy for global EV & ES transition
- We expect Genetec to deliver stronger yoy and qoq net profit growth in 1QFY23F, driven by healthy order backlog from the EV & ES segment.
- We believe Tesla’s plans to build up to 12 Gigafactories by 2030F will translate to healthy order visibility for Genetec. FY23-25F EPS lifted 7-12%.
- Reiterate Add with a lower RM4.30 TP, based on a lower 35x CY23F P/E.
1QFY3/23F earnings preview
Genetec Technology (Genetec) is scheduled to release its 1QFY3/23F results on 29 Aug We see stronger sales and net profit growth on qoq and yoy basis on the back of robust order backlog for electric vehicles (EV) and energy storage (ES). Genetec had total RM270m order backlog as of end-May 2022, out of which 86.7% was related to the EV & ES segment while the hard disk drive (HDD) segment accounted for 12.7%. Hence, we expect the group to recognise a portion of these orders in 1QFY23F.
Riding on a leading North America EV maker’s expansion plan
According to Genetec’s FY3/22 Annual Report, its top 3 customers made up 95% of the group’s FY22 revenue (vs. 81% in FY21), driven by Customer C, where revenue surged 5.8x yoy from RM28.2m in FY3/21 to RM163.9m in FY3/22. We believe Customer C is leading North American EV manufacturer, Tesla (TSLA US, NR). We see exciting growth prospects for Genetec on the back of Tesla’s aggressive expansion plan to build 20m EVs per year by 2030F. Tesla CEO Elon Musk highlighted during Tesla’s 2022 Annual Meeting last week that the company plans to have up to 12 Gigafactories globally to meet its target and it could announce its next factory location by end of 2022. Overall, we believe new EV plant expansion will translate into higher demand for automated manufacturing solutions and this should bode well for Genetec’s order visibility.
Raising FY23-25F EPS by 6.6-11.5%
We raise our FY23-25F EPS to account for higher contribution from the EV & ES segment on the back of growing demand for e-mobility solutions, such as integrated brake control (IBC) and electronic brake boosters (EBB) for hybrid and EVs. We expect the EV & ES segment to account for 85-90% of the group’s revenue in FY23-25F. Genetec is also in discussions with its key customer for potentially adding a new electrolyte filler production line system for the battery cell assembly process. This could be a new growth driver for the group as it offers higher content value per line compared to the formation process.
Reiterate Add with a lower RM4.30 TP
We retain our Add call on the stock with a lower RM4.30 TP as we peg our valuation to a lower 35x CY23F P/E, which is 0.5 s.d. above the Malaysian automated test equipment sector’s 5-year mean P/E of 30x, vs. 40x at 1 s.d. above mean previously in view of slower global growth. Nevertheless, we think Genetec should still trade at a premium given its unique customer exposure and as a proxy for global EV transition given its highest revenue exposure to EV & ES in the Malaysian tech sector.