KUALA LUMPUR: Public Investment Bank research (PublicInvest research) has initiated coverage on QES Group (QES) with a target price of 86 sen and an Outperform recommendation, to ride the semiconductor industry recovery.
It is currently trading at 69 sen a share.
QES is a 33-year old automated test equipment (ATE) provider specialising in machinery and systems used for testing and validating semiconductor devices and electronic components to ensure their quality and functionality.
QES has two core business divisions, namely, distribution and manufacturing.
Distribution made up the lion's share of the group's sales, with the semiconductor industry contributing about 47 per cent to the group's RM240.6 million revenue for the financial year ended dec 31, 2023.
PublicInvest research said its target price of 86 sen is pegged to 26 times of its financial year 2025 earnings per share, a 10 per cent discount to the industry average of 29 times.
It deems this justifiable given the lower earnings base, relatively small manufacturing earnings compared to its industry peers and higher risk given the low entry barrier for its distribution division.
"Nevertheless, we think the distribution division can be a two-pronged sword for the group as the business environment is recession-proof and there is low investment requirement, while the turnover period is short. It can provide steady recurring cash flows for the company to drive its manufacturing growth going forward," PublicInvest research said.
QES has exposure to semiconductor, electrical & electronics, automotive & metal, academia & research, petrochemical, pharmaceutical, environment and renewable energy markets.
Through an extensive network of distributors and representatives, it has a strong presence in the Asean region with an established customer base of more than 4,000 across Malaysia, Singapore, Philippines, Vietnam, Thailand and Indonesia as well as China.
Its clients consist of various industry players such as local Outsourced Semiconductor Assembly and Test (OSAT) players, steel makers and aluminium
producers as well as global tech giants such as Infineon, Intel and Osram.
None of its customers made up more than 10 per cent of its sales.
PublicInvest research said the company's management has been putting in efforts to develop new products or introduce enhanced version under its manufacturing division, mainly for the semiconductor industry.
These products are advanced equipment aimed at reducing operating cost and improving product yield through higher precision, integrated processes as well as automation.
"We believe the successful launching of these products could help to expand its manufacturing earnings contribution, which typically commands relatively superior profitability. Going forward, it expects the manufacturing segment to grow at double-digit and aims to expand manufacturing revenue contribution from the current 13 per cent to 30 per cent-35 per cent of group revenue," it said.