Analysts positive on D&O’s settled lawsuit, prospects

KOTA KINABALU: D&O Green Technologies Bhd’s (D&O) settlement to a long-dragged out lawsuit as well as its prospects in the based on its new growth strategy have been viewed positively by analysts.

Of note, the civil suit against D&O was related to the trade payables on the previous invoices that D&O has yet to pay since 2010 due to the ongoing conflict between Dominant Opto Technologies Sdn Bhd (Dominant – which is 89.8 per cent-owned subsidiary of D&O) and Geepar Enterprise Sdn Bhd (Geepar).

On Tuesday, D&O announced Dominant has agreed to pay RM10.156 million by June 18, 2018 to Geepar to settle the matter. Dominant has also agreed not to appeal against the said judgement.

“As this RM10.2 million settlement is lesser than the RM13.3 million where D&O has previously accrued under its trade payable in its financial year 2017 (FY17), net gains of RM3.2 million will then be recognised in the 2Q18 following the settlement, which is a positive development to the company from both financial and litigation perspectives,” said the research arm of Kenanga Investment Bank Bhd (Kenanga Research).

The research team at MIDF Investment Bank Bhd (MIDF Research) also noted that it expected minimal problem to D&O balance sheet and cash flow as it has cash exceeding RM50 million and net cash of RM13.31 million as of end-March 2018.

Meanwhile, on D&O’s performance, Kenanga Research highlighted that D&O’s profitability has improved by leaps and bounds since it rejigged its portfolio three years ago with the exit from the highly competitive and less profitable LED markets (for general lighting and LED TV) to focus on its core competency in Automotive LED.

“On the recently concluded 1Q18 results, (D&O’s) gross proift margin continued to scale new high, at 27.2 per cent on better product mix, all against the backdrop of industry-wide adverse currency translations.

“As of 1 Q 18, sales contribution from Automotive LED is already at circa 95 per cent compared to 50 per cent three years ago, with utilisation rate running at an optimal rate of 75 per cent (near to full capacity),” it added.

Aside from that, Kenanga Research pointed out that D&O has a five-year expansion plan to address its capacity constraints.

It noted that this plan consist of a new 2.41 hectare land cum factory building (additional two-fold of land area, which could house three-fold additional capacity).

“Construction will be completed in 1Q19, with its head office the first to move in. As of now, we only conservatively expect an additional 25 to 30 per cent capacity from existing capacity till FY19, with sales assumption underpinned by Automotive products,” it added.

In terms of product mix, the research team noted that D&O’s high-margin (by certain ppt) exterior lightings contributed only 30 per cent of total Automotive revenue in FY17.

“We expect circa 45 per cent share in FY19 to be anchored by new supply Business wins with Tier 1 Automotive LED customers stemming from new headlamps, alongside existing orders of Day Running Lights, Side signals, Position Lamps, Rear Combination Lamps which are still seeing wide adoption in new vehicles,” it added.

On its 70 per cent-sales denominated interior lightings, Kenanga Research said the group is already working on its smart RGB products (interior lighting) which would see commercial is at ion by 2020.

It noted that this single product, could see an average selling price (ASP) of at least three to four times higher than existing interior LED lightings.