KUALA LUMPUR (Feb 22): D&O Green Technologies Bhd shares rose 3.85% this morning on recording an 83% increase in its fourth quarter net profit, with analysts anticipating better profit margin and higher core net profit for the financial year ending Dec 31, 2018 (FY18).

At 10.43am, the counter rose 2.5 sen to 67.5 sen with 1.87 million shares done for a market capitalisation of RM654.87 million. The stock has grown 70.13% in a year.

Yesterday, D&O announced that its net profit for the quarter ended Dec 31, 2017 (4QFY17) grew to RM6.94 million from RM3.8 million a year ago due to an improved profit margin because of favourable change in sales mix, and increased production efficiencies.

Quarterly revenue grew 3% to RM132.53 million from RM128.64 million a year ago, driven by the automotive segment. D&O proposed a final dividend of 0.5 sen per share.

For the full year, D&O's net profit almost doubled to RM22.37 million, from RM11.27 million in FY16, while revenue grew 7.7% to RM463.34 million from RM430.1 million.

MIDF Amanah Investment Bank Bhd analyst Ng Bei Shan said with D&O's completion of its acquisition of Dominant Opto Technologies Sdn Bhd, there would be better profit margin for FY18 on anticipation of sustainable profit margin attributed to better product mix and improving operational efficiency.

"Our gross profit margin estimates have been adjusted to 26% from 24.7% previously. All in, we expect earnings per share (EPS) to rise by 7.7% to 2.8 sen. We have also imputed higher dividend payout ratio for FY18F which led to an increase in dividend per share to 1.3 sen from 0.8 sen previously," she said in a note to clients today.

Ng maintained a "neutral" rating with higher target price of 70 sen from 66 sen previously based on an unchanged price earnings ratio (PER) of 25 times pegged on FY18F EPS of 2.8 sen. The 25 times PER is a slight discount to the average PER of global lighting players that average at 27 times.

Meanwhile, Kenanga Investment Bank Bhd analyst Desmond Chong said for FY18E/FY19E, the research house conservatively expects an additional 25%/30% capacity each year from the existing capacity, from the new factory D&O plans to build over five years from 2018.

D&O expects production to increase by three times from current level when the factory is fully built.

"All in, we estimate a two-year core net profit (CNP) compound annual growth rate (CAGR) of 55% for the period of FY18E to FY19E, to be driven by a two-year revenue CAGR of 23% on the assumption of utilisation rate of 80% alongside capacity expansion of about 25% to 30% each in FY18/FY19E, higher earnings contribution from Dominant Opto, and earnings before interest and tax (EBIT) margin assumptions of 9.1% to 10.7% compared to 9.3% now, on better operational efficiency," he added.

Chong also raised D&O's FY18E CNP by 8% to account for higher EBIT margin on higher contribution from automotive products and better operational efficiency.

He maintained a "market perform" rating with an increased target price of 69 sen based on an ascribed 26 times FY18E PER (average three-year forward PER), and in line with its closest peer JHM Consolidation Bhd, which is trading at a forward PER of 26 times.

"Even with a higher-than-industry valuation being applied (+44% of the high-end semiconductor industry players of 18 times at two-year forward PER) for its niche position in the auto light emitting diode market, we still see limited capital upside from here," he added.