Review

• Elsoft’s 9MFY23 core net profit of RM6.7mn (-34.5% YoY) came below our full-year estimates at 64.9% due to weaker-than-expected demand for automated test equipment (ATE) and burn-in systems.

• YoY. 9MFY23’s core net profit dropped 34.5% YoY to RM6.7mn, dragged by weaker demand for ATE and burn-in systems amid the semiconductor sector’s downcycle. Revenue fell 40.4% YoY to RM13.9mn.

• QoQ. 3QFY23’s core net profit declined 50.0% QoQ to RM1.3mn as revenue contracted 48.6% QoQ to RM3.2mn on weaker demand for ATE and burn-in systems.

• Despite weak results, Elsoft remained on strong financial standing with a robust net cash position of RM103.2mn (+8.3% QoQ, +37.9% YoY) as at end-3QFY23.

Outlook

• Towards end-FY23, Elsoft continues to anticipate weak demand for its ATE and burn-in systems against the backdrop of slower capital expenditure amid the semiconductor sector's downcycle.

• Beyond near-term weakness, we continue to view catalysts for Elsoft from recently acquired Xyrius and the impending commercialisation of embedded controllers designated for peritoneal dialysis machines. Of note, Xyrius, a designer and manufacturer of customised automation equipment, is expected to help enhance the automation capabilities of Elsoft’s ATE and burn-in systems and thus, its competitiveness versus peers. That said, we believe efforts would only likely come to fruition over the medium-to-longer term.

Impact

• We have cut our FY23F earnings forecast by 14.4% after lowering revenue by 14.9% to reflect actual 3QFY23 results.

Valuation & Recommendation

• In all, we maintain our Hold recommendation on Elsoft with an unchanged TP of RM0.58 based on a PE multiple of 24.0x against CY24F EPS. Maintain Hold. We would view rerating catalysts to include strongerthan-expected demand for its ATE and burn-in systems, as well as traction with the acquisition of Xyrius, and the commercialisation of embedded controllers designated for peritoneal dialysis machines.

• Key risks include lower-than-expected demand for ATE and geopolitical tensions weighing on economic growth and disrupting supply chains.

Source: TA Research - 20 Nov 2023