Investment Highlights

• We retain HOLD recommendation on Globetronics Technology (GTRONIC) with an unchanged fair value of RM1.36/share, which implies a FY24F PE of 22x based on 1.5 SD above its 5-year historical mean given the recovery of the semiconductor sector. We made no adjustments to our neutral 3-star ESG rating.

• Our forecast earnings are maintained. The group’s 9MFY23 core earnings of RM16mil were within our expectation, accounting for 70% of our full-year forecast. Meanwhile, it was below street estimates, making up only 56% of consensus projection.

• YoY, the group’s 9MFY23 revenue declined 27% due to sluggish volume loadings from certain customers. 9MFY23 saw a lower contribution from the assembly and testing of quartz crystal timing devices and we believe certain customers have lost market share in this product.

• Higher utility and labour costs have lowered GTRONIC’s 9MFY23 EBITDA margin by 700 bps to 29%. Together with a 120 bps increase in effective tax rate normalising to 22% due to expired pioneer status of one of its subsidiaries, 9MFY23 core net profit fell by 46% YoY.

• On QoQ basis, GTRONIC’s 3QFY23 revenue improved by 10% to RM35mil, thanks to higher volume loadings from customers for sensors with the launch of a new smartphone model during the quarter. Its core net profit almost tripled to RM9mil as the group’s gross profit margin improved by 100bps to 45%. Plant utilisation rate climbed to 73% in 3QFY23 vs. 66% in 2QFY23.

• The group emphasised that the sensor division is expected to continue to be the main revenue contributor in FY23F and FY24F, mainly due to the launch of new smartphone models. GTRONIC has several projects in progress, including the development of next-generation sensors for its consumer product segment and the implementation of advanced packaging manufacturing solutions for both new and existing customers. Product launches from a new customer will be supportive of its LED division’s contribution of 15% to FY24F group revenue.

• GTRONIC also guided a capex spend of RM35mil in FY24F, of which RM20mil will be allocated for production equipment and the balance for facility equipment.

• We understand that GTRONIC is in the midst of diversifying its portfolio into non-consumer products in the industrial and automotive sectors. However, we remain neutral on the revenue contributions from both these segments in FY24F given the longer time required for product qualification.

• The lower volume loadings from key customers due to the downcycle of sector sentiment are seen as transitory pending the recovery of global economic growth. We see GTRONIC’s valuations as fairly valued trading at 23x FY24F PE, which is in line with its 5-year median.

Source: AmInvest Research - 25 Oct 2023