Investment Highlights

• We maintain our HOLD recommendation on Salutica with unchanged forecasts and fair value of RM1.66/share based on FY19F PE of 15x.

• Salutica's 1QFY18 core net profit came within expectations at RM6.2mil, growing 2.6x QoQ and 12% YoY. The net profit accounted for 21% of our full-year forecast and 20% of consensus.

• On a QoQ basis, the net profit rose on the back of a 62% jump in revenue. The significant leap in earnings was due to seasonality, as Salutica's customers normally increase orders in 1Q in anticipation of higher demand during the year-end holiday season. In addition, we understand that the group started the shipment of a new cableless product in mid-September, which contributed to the earnings growth as well.

• YoY, the net profit was fuelled by a 17% growth in sales of Bluetooth headsets in tandem with rising adoption of wireless devices.

• We believe earnings will accelerate further in 2QFY18, underpinned by the full ramp-up of a new cableless headset which was launched in mid-September by its customer.

• 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, we believe the company is fairly valued at this price. Salutica currently trades at a CY18F PE of 16x, while SKP Resources, V.S. Industry and PIE Industrial are trading at 16x, 16x and 13x respectively.

Source: AmInvest Research - 24 Nov 2017