Investment Highlights

• We maintain our BUY recommendation for Salutica with an unchanged fair value of RM0.61/share. Our earnings remained unchanged. Our FV is pegged to an FY20F PE of 14x.

• For FY19, Salutica reported core net loss of RM0.6mil, better than our forecasted net loss of RM1.3mil. Lower losses in 4QFY19 was due to improved cost control compared with 3QFY19. Also, aggressive promotion in the 4Q for headset models approaching end-of-life helped cushion losses.

• Salutica is poised to make a comeback in FY20. The company’s major client, Customer A, has recently released its third generation of true wireless earbuds with an upgraded Bluetooth chipset developed by Salutica, in collaboration with a Netherlands company. The new Bluetooth chipset promised to rectify the connectivity issue which has plagued the previous 2 models.

• Top technology reviewers like TechRadar, WIRED, Android Central and CNET have also acknowledged the improvements in the new earbuds, giving it a reputable rating of 4 to 4.5 stars. Feedback indicated that the new earbuds surpassed market-leading brands from the US and Denmark in its size (compact), battery life (longer) and audio quality (better).

• We foresee Customer A making up lost ground with the new earbuds that allow L/R simultaneous connection to the audio source for a more stable connection. Meanwhile, the US and Denmark rivals are still using conventional master/slave connection that relies on cross-head Bluetooth transmission, which is prone to connection drops. Moreover, Customer A’s earbuds run on Bluetooth 5.0, while its rivals are still on Bluetooth 4.0.

• In addition, the company has secured a job to produce 4 models of computer mouse for Customer A. This job is passed on to Salutica from Suzhou, China in order to avoid US tariffs. The first model has commenced production in July 2019 while the remaining 3 are slated to begin production in 2QFY20. The volume for mouse production is 7x larger than that for headset.

• We envisage the non-seasonality of everyday mouse to cushion the off-season dips of headset production, particularly in 3Q and 4Q. This will help to the company avoid negative surprises. We forecast sales from mouse production to contribute 46% of the group’s revenue in FY20F while headset contributes 48%.

• Currently, Salutica is trading at a discounted 1-year forward PE of 11x, representing a 23% upside to our FV

Source: AmInvest Research - 21 Aug 2019