Investment Highlights

• We maintain our HOLD recommendation on Globetronics Technology (GTB) with unchanged forecasts and fair value of RM2.39/share, pegged to an FY21F PE of 24x. This represents a 15% discount to our benchmark target PE for outsourced semiconductor assembly and test (OSAT) players of 28x due to GTB’s smaller market capitalization.

• Our benchmark target PE for outsourced semiconductor assembly and test (OSAT) reflects a 20% premium above the 3-year historical forward PE of 23x as prospects brighten due to innovations such as 5G, 3D sensors, and electric vehicles, which progress has been accelerated by Covid-19.

• GTB’s 3QFY20 came in within expectations at a core profit of RM17mil, bringing 9MFY20 core profit to RM33mil after excluding an RM2mil net exceptional gain mainly from amortization of deferred income. The 9MFY20 results accounted for 66% of and 61% of our and consensus’ full-year estimates respectively. We consider it to be in line with expectations as 9M results accounted for 51%–66% of full-year estimates for the past three years due to seasonality of its sensor product volumes which are typically stronger in 2H.

• YoY: 9MFY20 core profit rose 12% on a 5% higher revenue amid higher sales from Southeast Asia which offset declines in North American sales. The stronger revenue was due to higher volume loadings seen for GTB’s certain customers and better economies of scale following the group’s volume linearization strategy with certain customers for its sensor products.

• QoQ: 3QFY20 core profit more than tripled due to higher volume loadings for most customers and normalization of workforce capacity to 100%. The previous quarter was impacted by lower volume loadings and supply chain adjustments amid the Covid-19 pandemic, as well as limited production capacity at 50% from 18 March 2020 until 28 April 2020 due to the movement control order.

• We continue to like GTB due to: (i) its strength in smart sensors with new generation sensors’ demand expected to drive growth; (ii) ramp-up in laser automotive headlamps to boost LED/SSD segment; and (iii) potential opportunities to be secured from the US-China trade war amid discussions, leading to customer diversification and revenue enhancement potential. However, we deem that its positive prospects have been fairly valued. Key risks for the stock include decline in end demand for consumer electronics affecting the sensor division outlook, and prolonged supply chain disruptions due to the worsening Covid-19 impact.

Source: AmInvest Research - 28 Oct 2020