KUALA LUMPUR (Feb 7): Affin Hwang Investment Bank sees “a buy the dip” opportunity for D&O Green Technologies Bhd as it sees abundant catalysts for the stock after meeting up with the management.

Its analyst Kevin Low in a note on Monday (Feb 7) said that he sees several rerating catalysts for the stock ahead, including: i) D&O making progress in exterior lighting and in particular headlamp lighting, which should set in motion greater growth opportunities ahead as the management foresees the higher-margin exterior lighting business to surpass interior lighting, accounting for 55% of sales in 2022, up from an estimated 50% in 2021; ii) development of smart LEDs for another major German auto manufacturer; iii) increased smart LED application, including, among others, in projection lighting; iv) more infrared and smart sensors in the pipeline; and v) mini LED opportunities.

Low added that the company’s results for the fourth quarter ended Dec 31, 2021 (4QFY21), which are slated for release on Feb 24, are expected to see sequential and year-on-year improvements, driven by content growth and market share gains.

According to him, after plant shutdowns in 3QFY21 because of the Covid-19 pandemic, the group’s operations appeared to have normalised in 4QFY21.

While there has been an increase in the headcount (from under 2,000 to 2,500 currently), he said that this is largely to adhere to stricter standard operating procedures and also take into account improved worker welfare (ensuring that working hours do not contravene labour standards).

“On a positive note, while most companies have struggled with their headcount, D&O has been able to navigate this by employing retrenched workers from surrounding areas.

“Also, while the headcount has increased significantly, this is predominantly to prepare for an anticipated ramp[-up] in its business. Cost is, however, expected to remain contained as raw materials are still the single largest cost component, while new products, including its higher-margin smart LEDs and exterior lighting products, will likely help mitigate any increase,” he said.

He also estimated that D&O raised about RM200 million from its recent share placement, which would fund the expansion of its third plant.

According to him, construction is likely to commence later this year and be completed before the company's second plant is projected to be fully utilised by 2025.

“Its strong design win pipeline provides some certainty and hence earnings visibility,” he said, maintaining his "buy" call on D&O with a target price of RM8.40.

At 10.31am on Monday, D&O had risen four sen or 0.82% to RM4.90, valuing the group at RM6.01 billion.

Year to date, the counter had fallen 17.23%.