D&O Ventures Bhd
(Feb 8, 69 sen)
Not rated, fair value at 54 sen: Soon to be re-named D&O Green Technologies, D&O Ventures is principally involved in R&D, design and manufacturing of light-emitting diodes (LED) for flat panel TVs, automotive and general lighting applications. The company was listed on the Main Market of Bursa Malaysia in December 2004 and is located in Melaka. It has three operating units — Dominant Semiconductors, Omega Semiconductor and AEopto Technologies.

Given that D&O provides LED solutions to high-growth LED segments and has inhouse R&D capability, we believe it is comparable against Cree (US) and Philips Electronics (Netherlands) which are the main producers for the global LED market.

By giving a 20% discount on the market cap weighted average of 24 times to reflect D&O’s smaller market cap, we derive a target price-earnings ratio (PER) of 19 times. Accordingly, we derive an indicative fair value of 54 sen per share based on FY10 earnings per share (EPS). However, we are forecasting an EPS growth of 70.7% for FY11 and 49.8% for FY12 which suggests longer-term upside to our fair value estimate.

Management expects a capital expenditure of around RM80 million to RM100 million to set up a new plant in Laos as well as to expand its Melaka capacity. According to management, both the manufacturing plants will be expanded to twice the current capacity by end-2010.

Some risks to our forecast include slower-than-expected expansion in Melaka, teething issues in the set-up of the new Laos plant, the strengthening of the ringgit against the US dollar, intense competition as lower-end producers move up the value chain and rising costs for raw material such as gold wire, substrates and mould compound.

We are optimistic on D&O’s opportunities ahead, which we believe will drive longer-term earnings. Beyond management’s estimate of flat earnings for FY12/09 due to the progressive exit from the contract manufacturing business, we forecast earnings growth of 45% and 71% per annum respectively, driven by strong contribution from backlight units (BLUs) and backlight modules (BLMs) stemming from stronger-than-expected growth in the flat-panel market in China, and stronger LED demand from the general lighting segment.

Given that LEDs cost more than conventional lighting over the past two decades, demand for LEDs was limited to the automotive industry (interior lighting). However, we believe things are about to change given three key drivers, namely falling costs, green initiatives and medical applications.

While the overall LED market is expected to register growth in 2010, we highlight that D&O is targeting key high-growth segments — TV, automotive and general lighting. Although the application of LEDs for the automotive and general lighting segments started back in 1990 and is still growing, the use of LEDs in flat panel TVs only began in 2009 and is expected to grow significantly in the next four to five years. — RHB Research Institute, Feb 8


This article appeared in The Edge Financial Daily, February 9, 2010.