This article first appeared in The Edge Financial Daily on September 20, 2018
D&O Green Technologies Bhd
(Sept 19, 74 sen)
Maintain outperform with a higher target price (TP) of 85 sen: D&O Green Technologies Bhd’s (D&O) profitability is still on the uptrend even after a portfolio transformation which saw automotive contributing more than 95% of the total sales. This is backed by the group’s better operational efficiency premised on a higher vertical integration alongside better product mix.
In the latest results for its second quarter of 2018 (2Q18), gross profit (GP) margin continued to scale new high, at 27.5% on better product mix, all against the backdrop of industry-wide adverse currency translations. As of 2Q18, sales contribution from Automotive light-emitting diode (LED) remained high at around 94% (vis-a-vis 50% three years ago), with utilisation rate running at an optimal rate of 75% (near to full capacity).
The group continues to see high strike rate from its design-in with Tier-1 Automotive customers in both interior and exterior lightings. Note that typically when Automotive design-wins were obtained from its Tier-1 customers, the products could last for a good three to five years before it becomes obsolete. Though commanding high-margin (by certain percentage points) exterior lightings contributed only 30% of total Automotive year-to-date revenue, new headlamps, which are coming on-stream alongside existing orders of day running lights, side signals, position lamps, new rear combination lamps, which are still seeing wider adoption in new vehicles should help the group to achieve its 50:50 mix in two-three years time. We expect around 45% share in its financial year 2019 (FY19) to be anchored by new contract wins from Tier 1 Automotive LED customers.
For the interior lightings which dominate 70% of sales, the group is already working on its smart red green blue LEDs (on system integrated package technology) which would see commercialisation by second half of 2019 (2H19). Note that this single product, could see the average selling prices (ASP) of at least three to four times higher than existing interior LED lightings. All in, we expect GP margin to hover at 27% to 28% even after the assumption of softer US dollar/ringgit of RM4.05/US dollar compared to the previous year, which anchor our two-year core net profit compound annual growth rate of 64%. — Kenanga Research, Sept 19