Investment Highlights

• We maintain our HOLD recommendation on Globetronics Technology (GTB) with higher fair value of RM2.52/share, pegged to an unchanged FY21F PE of 24x (previously RM2.39/share). Our target PE 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.

• We raise our FY20F–FY22F forecasts by 6–12% to account for higher volume assumptions for its sensor division based on its strong outlook.

• We organized a conference call with management and came away with the following key takeaways:

• Results highlights: GTB’s 3QFY20 core profit of RM17mil brought 9MFY20 core profit to RM33mil, which was higher 12% YoY in tandem with a 5% YoY rise in revenue amid higher volume loadings for its three key sensors i.e. light, gesture and motion sensors; and better economies of scale following the group’s volume linearization strategy for its sensor products.
  
  On a QoQ basis, 3QFY20 core profit tripled as operations resumed with 100% workforce with the easing of movement control order (MCO) restrictions. See Exhibit 1 for 3QFY20 breakdown by product.

• Strong sensor outlook in 4QFY20: 4QFY20 volume loadings for GTB’s key sensors remain strong and stable except for end-December 2020 as some of its customers are looking at a supply chain shutdown for 1 week.

o Light sensor volumes are at 30mil/month, including the mass production of its new generation sensor since July 2020;

o Gesture sensor volume which is expected to ramp up to 40mil/month November 2020 onwards (vs. 3Q’s 35mil/month);

o Motion sensor volumes remain stable at 5.5mil/month after new components had been qualified for mass production in June 2020.

• Sensor updates: GTB has a new generation gesture sensor under development which is slated for mass production by end-1QFY21. However, progress was delayed by the MCO. Meanwhile, the group is working on co-developing next generation sensors for its customer for 2021 adoption which was reactivated after being delayed by lockdowns and border closures for approx. one quarter.

• Development of new business platforms: Qualification of the group’s bio-environment/gas sensor is ongoing with mass production aimed for 1QFY21, and a target revenue contribution of 5–6% for FY21. Meanwhile, its customer diversification efforts are also in progress with projects being in discussion with potential new sensor customers following the US-China trade war. The group has been selective with its new business platforms, aiming for more sustainable and long-term business with lesser dependency on labour-intensive processes.

• Expanding capacity to cater for new projects: GTB is looking to expand its Penang factory space by an additional 30K sq ft for roughly RM9mil capex, increasing its existing floor space of 240K sq ft by 12.5%. The group has allocated RM30mil for FY20 capex, which we have reflected in our forecasts.

• Flattish outlook for other businesses: 4QFY20 is expected to be flattish for its quartz crystal timing device (QCTD), solid state lighting/light emitting diode (SSL/LED) and other businesses.

• Laser light business still impacted but remains a key focus for FY21: GTB’s laser light headlamp production was impacted by inconsistent raw material supply i.e. wafer supply from California, the USA which had been impacted by Covid-19 restrictions due to high incidence of cases. The group aims for normalization of supply by December 2020 but the laser lighting business is expected to still be a key focus for FY21. Meanwhile, qualification programmes for other automotive laser light devices are ongoing.

• 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/SSL 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 a 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 - 2 Nov 2020