PETALING JAYA: Elsoft Research Bhd growth prospects are expected to be sustained by rising demand for the company’s new series of lighting-focused automated test equipment (ATE), particularly for those within its flagship smart devices and automotive segments.
In addition, the good progress the technology company is making in the medical device segment is also a positive sign of better times ahead for the group.
The company revealed that its order book had improved to RM29mil last month from RM23mil in November 2021, according to TA Research following its recent meeting with Elsoft’s management.
Optimistic of Elsoft’s prospects, the brokerage upgraded its recommendation on the stock to “buy” from “hold”, noting the risk-reward potential had turned favourable following recent share price weakness.
Elsoft’s shares closed half a sen higher last Friday at 94 sen.
Year-to-date, the counter has shed 9.6%.
TA Research maintained its target price for Elsoft at RM1.18, pegged to 33.0 times estimated earnings per share for 2022.
“We continue to like Elsoft for its improving order book, supported by the growing acceptance of its newer series of ATE within its flagship smart devices and automotive segments,” TA Research said in its report.
“For the smart devices segment, growth was driven by upgrades to the LED flash module of a major US end-customers’ upcoming smartphone line up; successful penetration into the front-end via its maiden series of wafer level LED testers; and customers’ new facilities as part of their geographic diversification efforts. As for the automotive segment, growth was underpinned by burn-in-systems for MicroLED-based head lamps and testers for 3D LED-based tail lamps,” it added.
TA Research noted with Elsoft’s recent success at the front end within the smart devices segment, the group could capture more opportunities across the entire supply chain (that is, from the wafer level down to the substrate and component level) rather than just its historical domain at the back end.
“This is also expected to help mitigate concentration risk to its core smart devices and automotive segments,” it said.
To recap, in the area of medical devices, Elsoft has designed and developed embedded controllers for a customer’s peritoneal dialysis machines.
“Management guided that medical certification is expected to be obtained in April or May 2022, and if its customer proceeds with commercialisation, we could see contributions kicking in towards end-2022,” TA Research said.
“While awaiting clarity on the potential order size upon commercialisation of the embedded controllers, we expect contributions to the group’s revenue to be smallish in the initial phase. Nevertheless, we believe that it offers bright prospects over the long term,” it added.
The brokerage said it would maintain its 2022 projections for Elsoft, with revenue and core net profit projected to grow 96.4% year-on-year (y-o-y) and 144.7% y-o-y to RM47.6mil and RM23.9mil.
“Our expectations for earnings to grow faster are premised on an anticipated margin expansion on the back of higher economies of scale and a better product mix.
“That said, we highlight a key downside risk being component shortage which management said has pushed delivery of some orders into later quarters,” TA Research explained.
As for Elsoft’s upcoming fourth-quarter ended Dec 31, 2021 (Q4’21) results, TA Research expected revenue and net profit to come respectively in the range of RM7.3mil-RM8.6mil (up 6%-23% quarter-on-quarter (q-o-q)) and RM3.6mil-RM4.1mil (15%-30% q-o-q).
“We expect growth to be driven by increased deliveries of smart devices testers and automotive burn-in systems and testers,” the brokerage said.
For Q3’21, Elsoft saw its net profit grow 8.1% y-o-y to RM2.98mil, as revenue grew 46.5% y-o-y to RM6.93mil.
For the cumulative nine months, the company’s net profit rose 33.8% y-o-y to RM5.37mil, while revenue increased 23.3% y-o-y RM13.2mil.