Investment Highlights

• We maintain our BUY recommendation on Salutica with a lower fair value of RM0.95/share (previously RM1.06/share) pegged to an FY21F PE of 14x.

• We lower our FY20F–FY22F earnings forecasts by 10–27% to account for more modest assumptions as material lead time is expected to impact order fulfilment for the earlier quarters in 2020.

• Salutica recorded a core loss of RM2.7mil in 1QFY20. Still in the red, the weaker set of results were due to revenue falling by 43% YoY amid lower sales volume of its current products and the new generation of wireless headsets.

• Furthermore, the group had incurred costs of RM0.7mil for the quarter relating to projects in its pipeline that have yet to generate revenue. Costs incurred include product line setup, product development costs, higher fixed costs and higher labour costs of new indirect headcount.

• On a QoQ basis, wider losses were recorded in 1QFY20 compared to 4QFY19 due to higher cost spent on the development of ongoing and future projects.

• Although the group had earlier guided for higher forecasts from key Customer A, Salutica’s order fulfilment had been constrained by material lead time. However, the group is positive for this to normalize in the upcoming quarter.

• Despite the hiccup faced in 1QFY20, we are cautiously optimistic on the group returning into the black in 2020 due to its slate of products set to launch for the year. As per our previous report, Customer A has doubled the forecasts for its 3rd generation of wireless earbuds, while also having two additional headsets in the pipeline which will adopt the upgraded Bluetooth chipset developed by Salutica in collaboration with a Netherlands company.

• Salutica is currently producing one computer mouse model for Customer A in which production started in July 2019, with three additional models already beginning mass in October 2019. The production of mice will help to stabilize fluctuations in sales during off-season dips of headset production in 3Q and 4Q.

• The group declared a dividend of 0.6 sen for the quarter and has a net cash of RM1.4mil at the end of 30 Sept 2019.

• We keep our BUY recommendation on Salutica due to its positive long-term prospects owing to its exposure to the growing true wireless stereo (TWS) market which is seen to benefit from the current trend of removal of headphone jacks in smartphones.

Source: AmInvest Research - 25 Nov 2019