• 2Q18 core earnings surged 80% yoy on higher volume loadings of products from key customers and forex gain of RM0.7m.

• Overall, 1H18 core earnings were below ours and consensus estimates, making up 43% and 37% of FY18 forecast respectively.

• We remain cautious on its outlook due to demand uncertainty in products by an end client amidst intense competition within the consumer segment.

• Maintain our SELL recommendation with a TP of RM1.33 based GGM formula that implies fair EV/ROIC multiple of 6.9x (WACC: 9.5%, terminal growth rate: 3%).

Low base effect

2Q18 earnings surged 80% yoy on the back of increased revenues due to higher volume loadings from a key client. The growth was also inflated by realised forex gain of RM0.7m. Similarly, 1H18 core earnings surged by more than 100% to RM21m on volume loadings from mass production of new products since 3Q17. Overall, 1H18 core earnings trailed ours and consensus expectations at 43% and 37% of FY18 forecast.

Weaker volume led to qoq decline

On qoq basis, core earnings fell 30% due to weaker sales volume which led to 17% decline in revenue. Additionally, earnings also declined on the back of higher effective tax rate in 2Q18.

Dividend declared

An interim DPS of 3sen was declared. This implies a payout of 42% and made up 25% of our full year DPS expectations of 12sen. Our DPS is based on 70% payout assumption in FY18.

Maintain SELL at TP of RM1.33

We maintain our SELL recommendation with a TP of RM1.33 (WACC: 9.5%, terminal growth rate: 3%) based on the GGM formula. This implies 18.5x FY18F PE and 16.6x FY19F PE. We remain cautious over Globetronics’ near term prospects amidst uncertain product demand by its end client as a results of the competitive consumer segment.

Source: BIMB Securities Research - 1 Aug 2018