• We maintain our HOLD recommendation on Salutica with a lower fair value of RM1.66/share (previously RM1.70/share) after lowering our FY18F-FY19F net profit forecasts by 2-3% for housekeeping reasons. Our FV is based on FY19F PE of 15x.

• Salutica's 4QFY17 net profit more than doubled to RM2.4mil from RM0.9mil in the previous quarter due to low base effect as well as seasonality.

• YoY however, the quarterly profit plunged 68% on the back of a 28% decline in 4QFY17 revenue. This was attributed to a delay in the launch of a new product, which had also affected operating efficiencies — high fixed overheads as a % of revenue due to underutilised facilities. The product is expected to be launched in the following quarter (1QFY18).

• Cumulatively, the group's FY17 net profit was 12% below our full-year estimate, dipping 20% YoY to RM19.4mil despite a 2% YoY expansion in revenue. Management said the contraction in NPM (from 10% in FY16 to 8% currently) resulted from costs incurred for several new product developments.

• Salutica declared an interim dividend of 0.6 sen this quarter, bringing total dividends for the year to 2.4 sen. This is in line with our projection. The group maintains a minimum dividend payout ratio of 30%. For FY18FFY20F,dividend yield is forecast at 2-3% annually.

• Moving forward, the company may benefit from: 
  i) accelerated uptake of wireless Bluetooth earphones sparked by the removal of headphone jacks and the availability of near-field communication (NFC) technology;
  ii) pickup in AirBar orders as consumers upgrade to Windows 8 or 10;
  iii) replacements of expensive touchscreen solutions (eg. capacitive) with Neonode's zForce technology; and
  iv) rising adoption of Salutica's in-house tyre pressure monitoring system (FOBO) to ensure safety of drivers.
   
• Although prospects appear bright for Salutica, valuations are uncompelling. Salutica currently trades at a CY18F PE of 16x, while SKP Resources, PIE Industrial and VS Industry are trading at 12x, 13x and 16x respectively.

Source: AmInvest Research - 23 Aug 2017