Investment Highlights

• We retain HOLD recommendation on Globetronics Technology (GTRONIC) with a lower fair value of RM0.99/share (from RM1.12/share), derived from a target PE of 16x based on revised EPS for FY24F (from FY23F previously). This unchanged target PE is based on the company’s 5-year historical mean valuation. We made no adjustment to our neutral 3-star ESG rating.

• We slashed our FY23F-FY25F earnings by 20%-51%, assuming more conservative sales estimates, after the group’s 1QFY23 results fell short of expectations.

• The group’s 1QFY23 core net profit of RM3mil (-80% QoQ, -67% YoY) only accounts for 7% of our earlier FY23F earnings and 8% of consensus.

• The group’s 1QFY23 revenue slumped 24% YoY to RM33mil, due to sluggish volume loadings. Notably, contribution from assembly and manufacturing of light, gesture and wearable sensors dropped to 55% of 1QFY23 total revenue from 62% in FY22. This is likely attributed to weak demand for smartphones globally.

• The lower utilisation rate of group’s production facility affected GTRONIC’s operating leverage and was reflected in the deterioration of its 1QFY23 operating margin (-11%- points YoY). The increase in labour costs due to minimum wage adjustment and electricity tariff hike also contributed to the spike in the company’s overheads.

• On the QoQ basis, GTRONIC’s 1QFY23 core net profit dropped by 80% due to lower revenue (-24%) as well as decline in gross margin (-16%-point). Lower depreciation expenses (-30% QoQ) helped to partially offset the impact of the higher operating cost.

• While the remainder of FY23 is expected to continue to be challenging, the company has multiple projects in the pipeline which could contribute to the recovery in earnings, on top of the broader market turnaround. The group is in the midst of co-developing next-generation sensors with one of its customers. GTRONIC also continues to actively engage with potential new customers as part of its FY24 growth plan.

• The stock looks unattractive at the current level of 17x FY24F PE (near its 5-year mean), above its 5-year mean of 16x PE. Nevertheless, it offers a decent FY24F dividend yield of 5%.

Source: AmInvest Research - 3 May 2023