D: Buy Rating Issued as Cost Efficiencies Bolster Outlook Amid Market Headwinds

A leading investment bank has upgraded its recommendation for the semiconductor components manufacturer to BUY, setting a new target price of RM1.20. This positive outlook comes despite a challenging first half, with the firm anticipating a stronger performance in the latter part of the year driven by operational efficiencies and a projected market recovery.

Performance Review

The company’s core earnings for the first six months of 2025 (6M25) declined by 50% year-on-year to RM15 million, falling short of expectations. This underperformance was primarily attributed to the negative impact of foreign exchange fluctuations and a prolonged slump in the global automotive market. Revenue for 6M25 also saw a 10% year-on-year decline to RM485 million, further weighed down by the appreciation of the Malaysian Ringgit against the US Dollar.

The LED business experienced soft demand, operating at a lower 65% utilization rate compared to the previous year, with limited order visibility. Furthermore, the new automotive modules business faced headwinds due to subdued volumes and tariff uncertainties. Increased cost pressures and sustained losses in the module business led to a contraction in the 6M25 EBITDA margin to 14.5%.

Discipline Cost Control Lifts Margins

Despite the overall first-half weakness, the second quarter of 2025 (2Q25) showed a significant improvement, with core net profit surging to RM13 million, a substantial recovery from RM2 million in 1Q25. This turnaround was largely driven by a 4-percentage point improvement in EBITDA margin, a direct result of ongoing cost optimisation initiatives implemented by management. These efforts are expected to create a leaner cost structure moving forward.

Future Outlook and Rationale for Upgrade

Management projects operations to stabilize by the fourth quarter of 2025, with expectations for 2H25 earnings to improve progressively. The investment bank has trimmed its 2025-27E EPS forecasts by 7-26% to account for increased cost pressures, projecting a 20% year-on-year decline in 2025E EPS. However, the upgrade to a BUY rating reflects the belief that “the worst is behind us,” and investor focus will shift towards an anticipated recovery in 2026E.

The new target price of RM1.20, revised down from RM1.30, is based on an unchanged 27x PER multiple applied to the lower 2026E EPS. The rationale for the upgrade emphasizes a lean cost structure and gradual recovery in order volumes, positioning the company for a stronger rebound.

Key Risks

Potential downside risks identified in the report include further strengthening of the Malaysian Ringgit, the possibility of customer attrition, production hiccups, and a prolonged weakness in the global car sales market.