Investment Highlights

• We downgrade Salutica to HOLD from BUY with a lower fair value of RM0.36/share (previously RM0.63/share). We cut our FY19F–FY21F net profit forecast by 41%–43% respectively to account for a longer-than-expected product development phase and the growing competition in the Bluetooth headset space. Our FV is pegged to an unchanged CY19F PE of 15x.

• Salutica’s 1HFY19 core net profit of RM3.3mil (-72.6% YoY) came in below expectation, accounting for 25% of our full-year forecast and 23% of full-year consensus estimate. Revenue came in at RM103.6mil, representing a 40% YoY drop from RM171.4mil in 1HFY18.

• For 2QFY19, the company recorded a core net profit of RM0.9mil (-84% YoY, -60% QoQ). Revenue for the quarter fell 46.5% YoY and 17.4% QoQ, owing to a longer-thanexpected product development cycle for the latest generation Bluetooth headset for one of its key customers. The delay was necessary as the company is incorporating a new technology which requires more stringent field test before approval for mass production. This model will replace the previous model which was launched in August 2017.

• 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 within this year.

• All in all, while we are positive on the accelerated uptake of wireless Bluetooth earphones sparked by the removal of headphone jacks in smartphones and the availability of near-field communication (NFC) technology. However, we remain cautious due to the intensifying competition in the space.

Source: AmInvest Research - 26 Feb 2019