This article first appeared in The Edge Financial Daily on October 5, 2018

D&O Green Technologies Bhd
(Oct 4, 95 sen)
Initiate coverage with outperform  and a target price of RM1.03: We started looking into D&O Green Technologies Bhd (D&O) in the late of 2015, when the company was in the midst of turning around after suffering three years of consecutive losses. The company made a timely and bold move of getting into the automotive light-emitting diode  (LED) business at that time, when the application of LEDs was still at an early stage. Today, the group has successfully established a strong footprint in the global automotive LED market, ranking No 4 worldwide. We believe the bullish prospects on the extensive use of automotive LED is likely to bring in stronger earnings growth for the group over the next few years. Given that the share price has performed admirably in recent weeks, we are more inclined toward suggesting an accumulation on weakness though the emergence of a new significant shareholder may also serve to bolster confidence and drive prices even higher.

The group has allocated RM40 million for a new manufacturing facility next to the existing plant in Melaka. Renovation work at the new factory building started two months ago and will be carried out in three phases over a six-year period till 2023. Under Phase One of the renovation plan, the new office building is expected to be completed by the second quarter of financial year 2019 (2QFY19) at a cost of RM29 million. Completion of the new office building will free up space in the existing plant for production capacity expansion, which could potentially double the current production capacity.

In contrast to the general lighting and television LED market, there is an ultra-high standard for the automotive LED segment as prospective suppliers will need to spend few years to go through pre-qualifying tests before being nominated for inclusion into the supply chain for module makers. Stringent requirements are necessary as any defects could pose damage to the automakers’ reputations and/or image. Under its “Dominant” brand name, it possesses the AEC-Q101 certification, a world class automotive quality standard.

We expect 15%-23% earnings growth for FY18-FY20. This comes as a result of the gradual exit from the LED market for general lighting and television in 2014, while also channelling its resources into the automotive LED market segment, which is more stable and has higher margins. Since then, the company has seen a successful turnaround with the revenue loss from the non-auto segment taken over by rapidly improving automotive LED sales. Core earnings also grew from a paltry RM700,000 to FY17’s RM13.9 million. We expect earnings growth of 15%-23% with a consistent gross margin of 27% over the next two years. As it takes at least one to two years to be a pre-qualified auto LED supplier, we see earnings visibility over the next few years.  — PublicInvest Research, Oct 4