Investment Highlights

• We downgrade Salutica to SELL from HOLD with a lower fair value of RM0.20/share (previously RM0.36/share). We project a loss of RM1.3mil for FY19F and cut our FY20F–FY21F net profit forecast by 13–27% to account for a longer-thanexpected product development phase and the growing competition in the Bluetooth headset space. We roll over our valuation period to FY20F, while our FV is pegged to a lower PE of 10x (previously 15x), representing a 28% discount from the sector forward average PE of 14x.

• Salutica’s 9MFY19 core net profit of RM0.3mil (-98% YoY) came in below expectation, accounting for 3.4% of our fullyear forecast consensus estimate. The large variance was due to the delayed production of the new generation Bluetooth headset. Salutica has been holding excess materials and resources but has not received approval from its key customer to commence mass production of the new model.

• Making matters worse, the existing models are being produced at a low quantity due to lacklustre sales. Several online reviews have given mediocre ratings compared with other brands which provide better quality at a similar price range.

• This is apparent in the 3QFY19 as revenue came in at RM19.4mil, 59% lower QoQ and YoY. As a result, the company recorded a RM3mil loss in the reporting quarter.

• The delay on the new model was blamed on the need for longer time to incorporate a new technology which requires more stringent field tests before approval for mass production.

• We remain cautions on 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.

• The company said it has secured two new customers in the wearable and headset segments. However, we have not factored in any contributions from this due to lack of guidance, and historical trend suggests that the company may not be able to meet its timeline.

• While we believe that the removal of headphone jacks in smartphones will increase the adoption of wireless Bluetooth earphones, Salutica’s key customer may not be able to fend off competitors offering headsets with better value for money. Also, being highly reliant on its key customer has proven to be more of a disadvantage in the recent quarters.

Source: AmInvest Research - 28 May 2019