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CGS-CIMB initiates coverage on GENETEC (0104) GENETEC TECHNOLOGY BHD with a whopping RM50 target price

THAT CGS-CIMB Research is initiating coverage on an ACE Market counter is already a rarity, one can imagine being conferred an “add” rating with a target price of RM50.

Such is the recognition that Genetec Technology Bhd is getting even as its stock price has shot through the roof, currently up more than RM3 to near the RM40-mark.

Deeming Genetec as an attractive proxy to global transition to sustainable energy, the research house opined that the developer of automation systems is well-positioned to benefit from the growing demand for electric vehicles (EVs) and stationary energy storage solutions (ES) via its major customers in these sectors.

“We see rising global demand for EVs as leading to higher demand for automation solutions for battery cell production,” projected analyst Walter Aw and Mohd Shanaz Noor Azam in their initiating coverage note.

“For example, Tesla has revealed plans for building 20 million EVs annually by 2030F which would require its annual battery cell production to grow to three terawatt-hour (TWh) in 2030F (from a CY22F target of 100 GWh).

“This is notwithstanding more demand to produce ES products (battery packs, etc.).”

Based on CGS-CIMB Research’s channel checks, Genetec specialises in providing automation solutions for the downstream battery cell manufacturing process. Of its RM205 mil orders announced from February 2021 to-date, 70% are from the EV and battery segments.

“We project Genetec to post a three-year earnings per share (EPS) compound annual growth rate (CAGR) of 235% (CY2020-2023F) from (i) more orders from its EV customers; (ii) more contract wins from existing automotive clients (EV and non-EV related); and (iii) higher economies of scale,” justified the research house.

“Note that we have yet to account for (i) any orders from other EV-based clients; (ii) more orders beyond current job scope (downstream) for its key EV client; and (iii) potential contracts from new businesses.”

With the company’s undemanding valuation (28.7 times CY2023F price-to-earnings ratio), CGS-CIMB Research believes that Genetec should re-rate from (i) expected robust earnings (three-year EPS CAGR of 235%); (ii) rise in institutional funds’ holdings (13% as of end-August 2021); (iii) narrowing valuation discount vs EV supply chain peers; and (iv) potential interest as an environmental, social and governance (ESG)-related play.

Meanwhile, Genetec’s downside risk include (i) cancellation of major orders; (ii) losing Tesla as a client (assuming that it is); and (iii) delays in customers’ growth plans.

At 11.40am, Genetec was up RM3.62 or 10.09% to RM39.50 with 467,500 shares traded, thus valuing the company at RM2.03 bil. – Sept 23, 2021


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