D: Inventory Overhaul Signals Brighter Future, Analyst Issues ‘BUY’ Rating
| Investment Bank | TA SECURITIES |
|---|---|
| TP (Target Price) | RM0.25 (+25.0%) |
| Last Traded | RM0.20 |
| Recommendation | BUY |
A leading player in automotive LED manufacturing is undergoing a significant strategic recalibration of its inventory policy, a move that, despite leading to a substantial non-cash impairment in the third quarter of fiscal year 2025 (3QFY25), is viewed as a necessary step to streamline operations and position the company for a robust comeback. This strategic cleanup has prompted a more optimistic outlook from analysts, leading to an upgraded recommendation.
Performance Review and Inventory Restructuring
The 3QFY25 period saw a notable inventory shrinkage, with values declining by 37% year-on-year from RM610 million to RM386.6 million. This was primarily attributed to a stringent new inventory policy aimed at clearing legacy automotive LED products. Key factors driving this policy include shifts in car lighting models by end-customers, an accumulation of “reject product” following enhanced reliability testing protocols introduced in 2021, and the cannibalization of older LED products by the more superior and higher-margin RCL SpicePlus 2520 LED.
The total impairment of approximately RM249 million is expected to see a recovery rate of 70%, with at least 50% or RM125 million anticipated to be written back into earnings over the next two fiscal years. Management views this as a non-cash, one-off event, confident that the bulk of impaired volumes will be reabsorbed from next year, indicating a strategic cleanup rather than a fundamental operational issue.
Future Outlook and Growth Drivers
Management projects a resilient path forward, anticipating mid-single-digit topline growth for FY26, with average utilization exceeding 75%, before accelerating to a stronger recovery in 2027. This optimism is underpinned by several key drivers:
- Global EV Market: Robust global electric vehicle sales and the introduction of solid-state battery technology, promising long lifespans and quick charging capabilities, are expected to significantly boost demand.
- Smart RGB LED Expansion: Smart RGB LED sales, currently representing 8% of group sales, are forecast to surge 70% year-on-year in FY26F, fueled by new car launches from German and Korean manufacturers.
- Strategic Product Commitments: The largest customer has committed a total volume of 268 million pieces (worth RM220 million) for the 2027-2036 period. Furthermore, the high-margin RCL Spiceplus 2520, which already accounts for 30% of group sales, is expected to grow 20% in FY26F. Two other significant car makers have also committed substantial volumes (490 million and 570 million pieces) for the 2025-2029 period.
- Technological Advancement: In-house IC-chip design is slated for commercialization by end-2027, following successful qualification for Open System Platform compliance and rigorous reliability tests. This development is expected to reduce smart LED costs and expand market reach.
Management also plans to maintain a cautious capital expenditure guidance of RM25-30 million for FY26 and aims to reduce net gearing from 0.32x to 0.12x, further strengthening its financial position.
Analyst’s Recommendation
Following these strategic developments and a reassessment of future prospects, analysts have responded with an upgraded outlook. Currently, the stock carries a BUY recommendation from TA SECURITIES, with a target price set at RM0.25, indicating a potential upside of 25.0% from its last traded price of RM0.20. This positive re-rating reflects confidence in the company’s long-term growth trajectory after its strategic inventory recalibration.
