As expected, Globetronics’ net profit plunged 40% qoq on soft sensor production volume. We expect its earnings to improve substantially qoq in 3Q18 on the strong ramp-up of new generation light sensor production, which will send sensor production volume to an all-time-high. Having said that, share price reflects the optimism. Sustainable sensor production volume beyond 3Q18 and clinching of new jobs are rerating catalysts. Maintain HOLD. Target price: RM2.52. Entry price: RM2.30.

RESULTS

Within expectations. Globetronics Technology (Globetronics) reported a net profit of RM9m (+41% yoy, -40% qoq) on the back of RM72m revenue (+14% yoy, -17% qoq) in 2Q18. 1H18’s net profit represents merely 29% of our full-year forecast but we deem the results in-line. We expect a much stronger 2H18, underpinned by higher production volume of light and gesture sensors from June onwards.

Qoq earnings down on soft light sensor production volume, ahead of transitioning to new generation light sensor production. The qoq earnings drop in 2Q18 was mainly due to the soft production volume of light sensors (average 15m units/month in 2Q18 vs 25m units/month in 1Q18 and 31m units/month in 4Q17). However, this was partially offset by the higher gesture sensor production volume which was close to 13m units/month in 2Q18 (1Q18: 10m units / month).

Margin compression qoq. Unsurprisingly, Globetronics’ net margin contracted 4.8ppt qoq to 12.7% in 2Q18 on lower sales of tax-exempted sensor products coupled with fixed operating costs and depreciation charges.

On a yoy basis, revenue grew 14% and earnings increased 51% due to higher loading volume for sensor products. To recap, 2Q17 only captured one month of light sensor sales as mass production of light sensors only started in Jun 17.

STOCK IMPACT

Revenue visibility improved in 2H18… Despite a weak 2Q18, Globetronics’ revenue visibility has improved. Mass production of new-generation light sensors commenced in June, and monthly production volume will increase from the year’s low of 10-12m units in May to 40m units in Aug-Oct 18 (2x higher than in June). Note that this 40m monthly production volume is a new high for Globetronics’ sensor production volume (previous high was 32m units in Dec 17). Recall that Globetronics invested in new machines which increased its capacity to 45-46m units/month in June vs 36m units/month prior.

…on sensors’ production ramp-up. Meanwhile, monthly production volume of gesture sensors is on a healthy uptrend, gradually increasing from April’s 11m to 16m-17m in June to August. Globetronics’ steady ramp-up of gesture production volume suggests that bundling of wireless headsets for one of its US-end customer’s upcoming premium smartphone is likely possible.

Client guided for strong growth in 3Q18, amid a widening customer base during its recent 2Q18 results announcement. Globetronics’ direct sensor client revealed that it expects strong revenue growth of 46-59% yoy and 78-94% qoq in 3Q18, driven by a high volume ramp-up in consumer optical sensors, in line with Globetronics’ strong production pipeline for 3Q18. Positively, Globetronics’ client, whose revenue is also highly dependent on the US-smartphone player, recently announced a design-win for an Android 3D sensing job for a Chinese smartphone vendor - Xiaomi. Although this potential job is not relevant to Globetronics, the client’s success in penetrating the non-US smartphone market could pave the way for more job wins from Android phone makers in the future, which could eventually benefit Globetronics.

Commercialisation of laser headlamps progressing well. With a Phase 1 investment of RM9m, production (small-scale production at first before ramp-up in 2019) of laser headlamps (for one car model) is poised to start in Oct 18, after more than two year’s stringent qualification process with end-customers in Europe. Laser headlamps could be a catalyst in 2019 once volume ramps up, and could also pave the way for Globetronics to seek growth beyond mobile device-related products. While trade concerns are currently weighing on the sentiment of European car makers (US is considering raising tariffs to 20% from 2.5% on European cars), automobile is still one of the key segments to watch out for over the mid-to-long term due to the proliferation of electric and autonomous cars.

EARNINGS REVISION/RISK

None.

VALUATION/RECOMMENDATION

Maintain HOLD with an unchanged target price of RM2.52, pegged to 15.5x 2019F PE (one multiple higher than mean PE). Following the recent move in share price, we view that the optimism towards the high utilisation rate of light sensor production lines in 3Q18 has been largely priced in. The next share price catalyst should come from the confirmation of sustainability of sensor loading volume (depending on consumers’ interest on upcoming new smartphone models) in 2019 and the ability to clinch new jobs.

SHARE PRICE CATALYST

Diversification beyond the US-smartphone end client is a key catalyst. Due to its high dependency on its US-smartphone end-client (contributes ~65% of 2018F net profit), Globetronics’ earnings have been volatile and share price sentiment has been largely affected by newsflow on this US-smartphone end-client. Working together with its direct sensor client, successful diversification of revenue streams into Korean or Chinese smartphone brands could be a key re-rating catalyst for Globetronics. Separately, we understand that Globetronics is also seeking diversification beyond the current sole direct sensor client on automotive-related sensors.

Source: UOB Kay Hian Research - 1 Aug 2018