Investment Highlights

• We maintain our BUY recommendation on Salutica with a lower fair value of RM0.63/share (previously RM0.77/share). We cut our FY19F-FY21F net profit forecast by 19%-23% to account for the growing competition in the Bluetooth headset space. Our FV is pegged to an unchanged CY19F PE of 15x.

• Salutica’s 1QFY19 core net profit of RM2.3mil came in below expectation, accounting for 14% of our full-year forecast and consensus.

• QoQ basis, the company swung into the black after recording a 35% increase in revenue, as the company started delivery of a new Bluetooth earbuds to one of its key customer. However, this was partially offset by lower orders for the predecessor model.

• The 62% YoY decline in earnings was a result of the initial low volume of the new Bluetooth earbuds, which is common for new product delivery during the initial product life cycle phase. Sales of the new model will likely gain traction towards the festive season sale.

• However, we are also cautious of Salutica’s reliance on its key customer given the intense competition in the Bluetooth headset space. With new launches of smartphones abandoning the headphone jack, smartphone manufactures are also capitalising on this trend by introducing their own proprietary Bluetooth headsets which may eat into Salutica’s market share.

• On a positive note, Salutica has secured two new customers in the wearable and headset segments. The wearable item will be a device embedded in the shoe insole for analysing running speed and patterns, while the headset product is a hearing aid.

• The insole device will likely be geared towards athletes who consistently track their running activities, providing a more comprehensive analysis than a typical health bracelet. Currently, the group is in the product development and prototyping stage, and expects the commercial launch in 2QFY19.

• Over the longer term, we believe the company would benefit from: i) an accelerated uptake of wireless Bluetooth earphones sparked by the removal of headphone jacks in smartphones and the availability of near-field communication (NFC) technology; and ii) the rising adoption of Salutica's in-house tyre pressure monitoring system (FOBO) to ensure safety of drivers.

Source: AmInvest Research - 27 Nov 2018