SCOMNET: Earnings Miss Expectations on Cost Pressures, Target Price Revised Downward
| Investment Bank | TA SECURITIES |
|---|---|
| TP (Target Price) | RM1.13 (+22.5%) |
| Last Traded | RM0.925 |
| Recommendation |
The company’s net profit for the first half of 2025 (1H25) significantly missed market expectations, falling short of both TA SECURITIES’ and consensus full-year forecasts by 35.5% and 34.8% respectively. This underperformance was primarily attributed to softer-than-anticipated sales coupled with elevated cost pressures during the period.
Performance Review
In 1H25, net profit experienced a year-on-year (YoY) decline of 17.5%, while revenue decreased by 3.4% to RM71.9 million. All business segments reported lower sales, with the medical segment remaining relatively flat as customers adopted a cautious stance amidst ongoing tariff negotiations. The automotive segment was particularly affected by reduced order volumes from Stellantis. Profit Before Tax (PBT) margin contracted by 4.2 percentage points to 23.8%, pressured by a weakening USD and rising labor costs.
On a quarter-on-quarter (QoQ) basis, 2Q25 PBT declined 11.2% to RM8.1 million, despite an 11.1% increase in revenue to RM37.8 million. The uptick in sales was partly due to fewer operating days in the previous quarter, as Chinese New Year and Hari Raya holidays coincided in 1Q25. The medical segment remained the dominant revenue contributor in 2Q25, accounting for 81% of sales, with automotive and industrial segments contributing 2% and 17% respectively.
Future Outlook and Analyst Action
Looking ahead, TA SECURITIES anticipates a slightly better second half of 2025 (2H25). This optimistic outlook is supported by expected organic growth, increasing orders for smart cables, and the scheduled launch of new EEG wires in September. Other products in the pipeline, pending FDA approval, include the mini drill bit, Nanomedicine Therapy Device, and Syringe Infusion System. The automotive segment is also expected to gradually rebound, driven by higher orders from Stellantis and expansion into new international markets.
Following the lower-than-expected earnings, TA SECURITIES has revised down its FY25-27 earnings projections by 22-24%, after adjusting sales assumptions by approximately 16.8% and factoring in higher costs. Despite these revisions, the investment bank reiterates its BUY recommendation on the stock. However, the target price has been lowered to RM1.13 per share (from a previous RM1.46), based on an unchanged 27x CY26 EPS, indicating a 22.5% upside from the last traded price.
