Results Analysis: Margin pressures remain
- FY23 net profit below expectations despite 2H23 showing recovery
- Gross margin remains below optimal level despite improvement; new initiatives still in development stage
- Outlook for EV battery, industrial equipment weak; nanofabrication brighter, with projects at mass production
- FY24F/FY25F earnings slashed by 15%/16%; maintain FULLY VALUED with lower TP of S$0.63
2H23 hit recovery; FY23 net profit still below expectations. 2H23 saw a recovery in business performance compared to 1H23, with the group registering net profit S$10.8m (-56.9% y-o-y) on the back of a 17.6% decline in revenue to S$103.9m. The recovery was led by 3C recovery from improving inventory rebalancing and new end-customers’ product launches. The industrial equipment segment was still weak, impacted by customers’ slowdown in capex spending. Overall, for FY23, net profit of S$3.1m (-92.8% y-o-y) was still below our expectations, even though the revenue of S$177.0m (-25.4% y-o-y) was slightly above our estimates.
Gross margin improved but remains below the optimal level. Gross margin in 2H23 improved to 40.6% – from 32.0% in 1H23 – but remains lower than the 48.7% in 2H22. Gross profit margin for FY23 was 37.0% – vs. 46.9% in FY22 – as operational cost savings from on-going cost optimization efforts were offset by the increase in material cost due to product mix, with higher material contents and other costs.
Slower-than-expected progress for the EV battery coating division. Apextech’s green plating business is facing challenges from prolonged qualification processes, sluggish industry growth, and slow customer acceptance of new technology.
Industrial equipment segment could still be weak, as one of the product lines is reaching market saturation, which resulted in fewer growth opportunities while sales in China remained slow. Some projects are at various sales stages, however the gestation period could be long, and hence this segment could stay weak in the near term.
Outlook for Nanofabrication unit brighter, with projects at mass production. The outlook for Nanofabrication is positive, as the micro-lens array (MLA) lenses in consumer wearables and Fresnel lenses for smartphones are already in mass production.
We expect a brighter outlook ahead, as more consumer electronics use more sophisticated optical technologies.
Improving pipeline visibility for consumer segment. In the consumer segment, some existing products are slated for mass production, with new projects at the NPI stage, and the possibility to enter mass production. In the smartphone category, the group has also commenced mass production for a projection for new customers.
Riding on China +1 with geographical expansion. The group has manufacturing facilities in Vietnam, with its second site expected to be operational in 1Q24. In India, a small operation is expected to commence in 1Q24. The group has also recently entered the European market via the acquisition of a coating solutions company in Germany. This puts the group in a good position to ride on the trade diversification trend.
FY24F/FY25F earnings slashed by 15%/16%; maintain FULLY VALUED with lower TP of S$0.63. Given the weaker-than-expected outlook for some segments such as EV battery and industrial equipment, coupled with still-high cost structure as new initiatives are still in the development stage, we cut FY24F/25F earnings by 16%/15%. Our TP is reduced accordingly to S$0.63 (S$0.83), pegged to 18x PE on FY24F earnings. Maintain FULLY VALUED.
