This article first appeared in The Edge Financial Daily on June 10, 2019

QES Group Bhd
(June 7, 21.5 sen)
Maintain buy with an unchanged fair value (FV) of 30 sen: Our valuation is based on an unchanged forecasted financial year 2019 (FY19F) price-to-earnings (PER) multiple of 15 times, while maintaining our earnings forecast.

We came away from QES’ first quarter (1Q) of FY19 briefing learning that its semiconductor customers are opting to upgrade their existing equipment instead of purchasing new ones.

Such a move is in line with what industry players are doing, cutting capital expenditure due to uncertainties from the US-China trade war.

This explains the lower sales from its manufacturing segment — RM2.5 million in 1QFY19 versus RM6.2 million in 1QFY18.

Fortunately, the company’s bread and butter business is distribution of parts to semiconductor and automotive customers. While new sales of semiconductor equipment may be weak, QES is seeing more orders for its distribution business from customers who are upgrading equipment to achieve better yield rates instead of purchasing new ones.

With QES offering maintenance and servicing, the company is also able to earn fees from performing the upgrades for its customers.

For 1QFY19, revenue for distribution and maintenance rose 19.6% year-on-year (y-o-y) and 16.7% y-o-y respectively.

QES’ long-term strategy is still focused on expanding its manufacturing segment with two models of automated optical inspection equipment slated to be launched in 1QFY20.

In the near term, the company has secured a project from its customer to distribute voltage sag regulators for protection of semiconductor equipment from minor voltage spikes which may result in yield loss.

The project is worth around RM4.5 million and will be recognised over the next two quarters.

QES is also in talks with one of its existing customers to distribute cooling additives and hence optimise cooling towers for better energy efficiencies.

Also, QES’ long-standing relationship with semiconductor customers provides an advantage for the company to market this to semiconductor facilities which are heavily dependent on cooling towers.

We continue to like QES for its (i) manufacturing segment, which may lead to margin expansion with fully automated machines commanding four times higher average selling price compared with semiauto ones; (ii) recurring revenue from its trading and servicing business that remains defensive amid the trade war; and (iii) undemanding valuation of 10.3 times FY19F PER, representing a 39% discount to the sector average forward PER of 17 times. — AmInvestment Bank, June 7