• We initiate coverage on Salutica with a HOLD recommendation and a fair value of RM1.70/share. Our fair value is based on FY19F PE of 15x.
• Our P/E multiple is slightly higher than the peer average of 13x as we think Salutica deserves scarcity premium for being the only listed Bluetooth player in Malaysia.

• Salutica is an electronics manufacturing services (EMS) company, primarily specialised in Bluetooth devices such as stereo headsets. Salutica works with some of the most prominent players in the wireless headphone market including Plantronics, Jaybird and Sony.

• We forecast Salutica's PATAMI to grow from RM24mil in FY16 to RM44mil in FY19F, representing a 3-year CAGR of 22%. This is premised on:

i) accelerated uptake of wireless Bluetooth earphones sparked by the removal of headphone jacks by smartphone makers and the availability of near-field communication (NFC) technology that enables quick and automatic pairing;
ii) pickup in AirBar orders as consumers upgrade to Windows 8 or 10;
iii) replacements of expensive touchscreen solutions such as capacitive with Neonode's zForce technology, which could potentially bring manufacturing jobs to Salutica; and iv) rising adoption of Salutica's TPMS products (FOBO) by logistic companies, especially those with trucks, to ensure the safety of drivers.

• One of Salutica's major customers will be rolling out a new headphone model in the third quarter of CY17. We expect this to drive capacity expansion from 14mil units p.a. in FY16 to 23mil in FY19F to support the production of the new model as well as other existing products. From this, headset revenue is expected to register a steady CAGR of 10% from FY16-FY20F.

• All-in, while prospects are bright for Salutica, valuations appear uncompelling. Salutica currently trades at a CY18F PE of 17x, while VS Industry, SKP Resources and PIE Industrial are trading at 12x, 11x and 12x respectively. Salutica maintains a minimum dividend payout ratio of 30%. For FY18F-FY19F, dividend yield is forecast at 1.6-2.1% annually.

Source: AmInvest Research - 10 Jul 2017