EG: Operational Strength Boosts Outlook, Buy Rating Affirmed
| Investment Bank | TA SECURITIES |
|---|---|
| TP (Target Price) | RM0.25 (+25.0%) |
| Last Traded | RM0.20 |
| Recommendation |
A prominent investment bank has maintained a “BUY” rating on an undisclosed company, setting a new target price of RM0.25. The positive outlook is primarily driven by the company’s robust operational performance, particularly the ramp-up in high-value optical module production and significant developments in high-performance computing components.
Operational Highlights Drive Stronger Earnings
The company recently reported a positive business outlook, highlighting strong demand for its optical modules and 5G wireless access products. The production ramp-up of 800G optical modules at its Batu Kawan facility is progressing as planned, paving the way for stronger earnings in the second half of FY26. A notable shift in product mix is underway, with 800G modules projected to account for 60% of output in 3QFY26, up from 40% in 2QFY26, while 400G products are declining.
Production yields have shown steady improvement, reaching approximately 80%. This enhanced operational efficiency, combined with the increasing contribution from higher-margin 800G modules and 5G wireless access products, is expected to fuel significant margin expansion and overall earnings growth for the second half of the fiscal year. Furthermore, the company benefits from pass-through mechanisms that allow it to absorb higher logistics and raw material costs from its key customers, minimizing impact on profitability.
Future Growth Avenues and Risk Assessment
The company’s future prospects are further strengthened by its entry into new high-performance computing (HPC) markets. Its new active electrical cable (AEC) and direct attach copper (DAC) cables have successfully passed customer qualification audits. A customer for these HPC products has been secured, with contributions anticipated to begin in 4QFY26, deepening the company’s involvement in the data centre ecosystem.
Expansion continues with the Thailand facility on track for completion by the end of calendar year 2026, positioning the group to capitalize on growth opportunities in energy storage, electric vehicles (EVs), and data centre applications. Concerns regarding the Middle East conflict are deemed minimal, with cost increases typically passed through to customers.
The investment bank remains optimistic about the company’s trajectory, bolstered by the anticipated increase in high-end optical modules and new customer acquisitions driven by accelerating AI and cloud adoption. Potential downside risks include the loss of key customers, delays in product ramp-up, and weaker-than-expected customer orders.
Recommendation
Based on these factors, the investment bank reiterates its “BUY” recommendation, with a 12-month target price of RM0.25, representing a potential upside of 25.0% from the last traded price of RM0.20.
