EG Industries Berhad - Scaling the Photonics Value Chain
Mon, 16-Mar-2026 07:59 am
by Research Team • Apex Research

Counter

EG (8907)

Target Price (RM)

2.02

Recommendation

Buy

  • PG2 Batu Kawan Outperforming: Plant is ahead of schedule with ~80% utilization and yields rising to ~80%. Mass production of 800G optical modules starts June 2026, driving a strong 4QFY26 rebound. Revenue is now 78.8% driven by 5G wireless and photonics

  • High-Margin Expansion: Future growth hinges on 1.6T module readiness by late 2026 and expansion into AEC/DAC components. Thailand operations are pivoting to EV and energy storage, while 400G/800G ramping for new customers supports growth through FY28.

  • Valuation and Recommendation. Maintain BUY on EG with a revised target price of RM2.02, based on 14.5× FY27F EPS of 13.9 sen. The stock trades at a discount to its EMS peers, which we believe fails to reflect EG’s 28% three-year EPS CAGR and its successful transition into a high-end networking solutions provider.

     

We came away from EG Industries 2QFY26 results briefing with the following takeaways:

 

Results Recap. 1HFY26 revenue was RM723.9m (+6.2% YoY), driven by stronger 5G wireless access and photonics sales. Reported PATMI was RM59.8m (+21.5% YoY), supported by improved product mix and higher optical module yields. 2QFY26 core PATMI was RM25.7m (+9% QoQ, +22% YoY), with 1HFY26 core PATMI at RM49.3m (+21% YoY) – in line with forecasts at 46% of full-year estimate. Core net margin dipped to 6.8% in 1HFY26 (FY25: 7.6%), largely due to FY25 revenue base adjustments rather than structural erosion. Management expects revenue and margins to improve, supported by a stronger product mix and optical module ramp-up.

 

PG2 Batu Kawan Plant. All four first-floor workshops are fully operational at ~80% utilisation, ahead of the >50% end-3QFY26 target. The ~20% spare capacity is intentionally maintained for new customer onboarding. The plant is fully CIG-qualified with ~1,000 workers and ~100 on-site CIG engineers supporting yield improvements. Yields have improved to 70–80% (from ~50%), with some runs reaching 90% – a key driver of margin recovery. CIG has invested RM200–300m in equipment, structurally supporting EG's margin profile. The second floor, dedicated to 800G production for a new hyperscaler, is under renovation pending formal customer commitment, with customers co-funding ~50% of floor investment. Mass production of 800G is targeted for June 2026.

 

Optical Modules. The 800G/400G mix has shifted to ~60:40 (from 20:80), supporting higher blended ASPs and margins through 3Q–4QFY26. Customer M has been added alongside Customer C, ramping 400G and 800G faster than anticipated. EG targets 1.6T readiness by Nov–Dec 2026 – ahead of the prior 2027 assumption. Optical modules are also seeing demand from military drone applications, adding a new vertical beyond DC and 5G. CPO (Customer R), required for EV and medical applications, is more complex to qualify than conventional LPO, suggesting a more measured ramp at the hyperscaler floor.

 

Other Segments. (i) AEC/DAC: EG has passed customer audits, with mass production commencing at Sungai Petani in coming months. One new customer was onboarded in 2QFY26. AEC/DAC is expected to be a more meaningful earnings driver in FY27–28 rather than FY26.  (ii) Wireless & Consumer: Wireless router demand from Customers G and N remains supportive; Customer D's consumer electronics orders are declining due to geopolitical disruptions but a recovery is expected once conditions normalise.

 

Raw Materials and Forex. Most contracts are turnkey with pass-through mechanisms, limiting raw material cost exposure. High-value ICs are secured by CIG up to two years in advance. With 80–90% of revenue denominate in USD, MYR strength is a headwind, partially offset by forex translation gains on USD-denominated borrowings of RM588m. USD/MYR assumptions are RM4.03/4.00/4.00 for FY26/27/28F. Every 1% decline in USD/MYR reduces core earnings by ~1.3%, partially cushioned by lower USD debt servicing costs. On logistics, transportation costs are rising due to global disruptions but EG is fully insulated under FOB-structured contracts – all shipment costs are borne by customers. 

 

Thailand Expansion:  EG is developing a new 20,000 sqm manufacturing facility in Prachinburi, Thailand, with total capex of approximately RM100m over two years (construction cost: RM40m; completion target: end-2026). The plant is earmarked for electricity storage components, EV-related products, and data centre applications.  Management highlighted that the Thailand expansion was partly customer-driven – existing customers preferred a newer, purpose-built facility to meet their audit and operational standards. Growth phasing: FY27 – energy and EV-related components from Thailand (Customer T). FY28 – energy storage systems and power devices (Customers K and S) to facilitate energy supply for data centres, with potential involvement in carbon credit markets. 

 

Outlook: 3QFY26 near-term: Management guided for a broadly soft 3QFY26, weighed down by: (i) the heavy concentration of public holidays – Chinese New Year in February and Hari Raya Aidilfitri at end-March – which materially reduces effective working days and production output; and (ii) the sharp appreciation of MYR vs. USD, which dampens RM-translated earnings. Consumer electronics orders are also expected to remain subdued due to geopolitical tensions. 4QFY26 recovery: Management expects a strong rebound in 4QFY26, driven by: (i) 800G optical module mass production commencement at PG2's second floor (targeted June 2026); (ii) AEC/DAC mass production contributions ramping from 3QFY26; (iii) Sungai Petani (Plot 36) production ramp for network switches; (iv) better operating leverage as PG2 reaches high utilisation; and (v) continued yield improvement supporting margin expansion. Overall FY26 outlook is positive, with optical module and wireless access production continuing to run at healthy levels. FY27–28 multi-vertical growth: AEC and DAC become the next major earnings driver alongside optical modules in FY27. Thailand's energy/EV platform (FY27) and energy storage systems (FY28) add new growth verticals that are largely uncorrelated to the consumer electronics cycle, broadening EG's addressable market well beyond traditional EMS.

 

Forecast. No changes to FY26F/FY27F/FY28F. Core earnings forecasts remain RM108.0m / RM130.2m / RM154.0m, implying a 3-year EPS CAGR of 28%. Key upside risks include faster 800G ramp, stronger network switch volumes, earlier AEC/DAC production, Thailand orders ahead of schedule, and earlier 1.6T commencement.

 

Valuation and Recommendation. Maintain BUY with a revised TP of RM2.02 (14.5x FY27F EPS of 13.9 sen), implying 91% total upside from RM1.06. EG trades at ~9.2x FY26F PE – undemanding relative to its 28% EPS CAGR and peers (EMS: 11.7x; broader tech: 27.4x). The post-briefing picture reinforces the bull case: PG2 ahead of schedule, mix shifting to higher-margin 800G, and the FY27–28 growth runway broader than the market appears to be pricing. Re-rating potential is significant as earnings execution becomes more visible from 4QFY26.

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