Investment Highlights

• We maintain our BUY recommendation on Salutica with a higher fair value of RM1.06/share (previously RM0.61/share) pegged to a rolled-forward FY21F PE of 14x. We have increased our FY20F–FY22F earnings forecasts by 20-28% to account for higher order forecasts from Customer A after visiting the group’s Ipoh plant recently.

• Key takeaways from the meeting:.

• The group said Customer A’s recently released third generation of true wireless earbuds equipped with an upgraded Bluetooth chipset (developed by Salutica, in collaboration with a Netherlands company) was rated 4.7 out of 5 stars on American MNC electronics retailer

Best Buy’s website, with reports of better audio quality and long battery life. It also has a comfortable and lightweight fit and 30% smaller in size compared to its previous model. Salutica is running at near peak production capacity, prompted by Customer A doubling its forecasts for the product.

• Furthermore, the group said it has two more true wireless headsets in the pipeline that will adopt the new Bluetooth chipset that is currently used in the aforementioned product.

• For Customer A, which Salutica has secured jobs to produce 4 models of computer mice, the first model has commenced production in July 2019 while the remaining 3 models have also begun mass production as at our meeting in late October 2019.

• The production of mice will help stabilize fluctuations in sales during off-season dips of headset production in 3Q and 4Q. We have already included these in our forecasts, estimating sales from computer mice to be around 50% of group revenue in FY20F while headsets contribute 45%.

• Salutica is trading at a discounted 1-year forward PE of 12x, vs. our target PE of 14x. We continue to like Salutica’s exposure to the growing true wireless stereo (TWS) market. We are positive on the uptake of TWS earphones sparked by the removal of headphone jacks in smartphones. This trend has been trickling down from flagship smartphones to mid-end smartphones, where the mid-end smartphones contribute a larger chunk of the total smartphone market.

Source: AmInvest Research - 1 Nov 2019