D&O Green Technologies Bhd(D&O) has been downgraded to NEUTRAL from BUY by MIDF Amanah Investment Bank Bhd (MIDF Research), following the semiconductor company's 3QFY24 results. The target price has been revised down to RM2.07 from RM3.85 due to an unfavourable sales mix that led to a significant 69.1% year-on-year decline in earnings to RM6.5 million.

This was in contrast to the resilient performance reported in 3QFY23, which saw earnings of RM18.3 million. For the nine months ending September 2024, D&O's earnings grew by 29.1% year-on-year, totalling RM29.2 million. However, this recovery fell short of both MIDF Research's and consensus expectations, as it accounted for only 33.6% and 38.4% of full-year forecasts respectively.

The main issue for D&O during the quarter was the unfavourable shift in its sales mix, which led to a contraction in profit margins, falling to 2.4% from 7.7% in the same period last year. Despite automotive revenue being marginally down by 0.4% year-on-year to RM266.8 million, the lower margin on these sales had a significant impact on earnings. The company's 9MFY24 financial performance, while showing some improvement in automotive revenue—up by 14.5% year-on-year to RM795.5 million—was not enough to meet market expectations.

The pace of earnings recovery has also been slower than anticipated, which has prompted a more conservative outlook. As a result, MIDF has revised its earnings estimates for FY24 to FY26 downward by 27.8% to 43.9%, adjusting both revenue and profit margin assumptions. This reflects the company's changed product mix and the weaker-than-expected recovery.

Looking ahead, MIDF Research's revised target price of RM2.07 is based on a lower target price-to-earnings (PER) ratio of 33.4x, which is the company's five-year mean. This adjustment accounts for the near-term challenges faced by the automotive industry, which is expected to continue weighing on D&O's earnings growth. As a result, the downgrade to NEUTRAL comes as MIDF Research expects the near-term decline in global automotive production to cap D&O's earnings potential, despite the long-term prospects of increased LED adoption in vehicles.