Investment Highlights

• We upgrade Salutica from HOLD to BUY with a lower fair value of RM1.45/share (previously RM1.66/share) based on an unchanged FY19F PE of 15x. We believe the recent selldown of Salutica shares — likely attributed to the weaker USD — is overdone.

• We are keeping our FY18F net profit forecast as Salutica typically hedges its entire FX exposure 3–9 months ahead. However, we are trimming FY19F–FY20F's by 12% as we revise our USD/MYR assumptions for the period from 4.12 to 3.95.

• Salutica's 2QFY18 core net profit came within expectations at RM5.8mil, declining6% QoQ and 45%YoY. This brings 1HFY18 net profit to RM12.0mil (-26% YoY), accounting for 41% of our full-year forecast and 39% of consensus.

• Despite a marginal revenue dip (4% YoY), 2QFY18 net profit dropped by a larger quantum owing to higher R&D expenditure and escalated expenses resulted from greater complexity of a new cable-less product. YTD, revenue was up by 5% YoY thanks to higher sales of Bluetooth headsets, but net profit declined for the same reasons.

• QoQ, revenue continued to register growth (4.5%) due to sustained interests for its customers' Bluetooth headsets. Moving into 2HFY18, we believe earnings will improve as operating expenses and profit margins normalise.

• 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 (e.g. 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.

• Salutica is currently trading at an undemandingCY18F PE of 10x, while SKP Resources and V.S. Industry are trading at 15x and 13x respectively.

Source: AmInvest Research - 12 Feb 2018