• 3Q18 core earnings surged 79% yoy and more than 100% qoq on higher volume loadings of high value products from key clients as well as forex gain of RM0.42m.

• Overall, 9M18 core earnings rose 91% and were above ours but trailed consensus estimates to make up 96% and 59% of FY18 estimates respectively.

• We raised our FY18-21F earnings by 31-38% as we expect higher contribution coming from sensors and LED business as well as favourable exchange rate.

• Upgrade to HOLD with a new RM2.50 TP. Accumulate on dips as we believe its medium term prospect would improve as the LED business gains traction, providing better revenue diversification.

Structural improvement

3Q18 earnings surged 79% yoy and more than 100% qoq. We believe this could be due to higher volume loadings for the sensors business from key clients. EBITDA rose 52% to RM35.6m while we note that net opex fell 18% yoy possibly on the back of the new loadings are high value products; EBITDA margin improved 14ppts to 40.6%. The growth was also inflated by realised forex gain of RM0.42m.

Outstanding 9M18 performance

The strong 3Q18 performance boosted the overall core earnings growth for 9M18 which surged by 91% to RM45.9m. While revenue has been on a recovery trend since 3Q17, the lower-than-expected costing was the main driver to 3Q18 profit surge. Overall, 9M18 core earnings were above our expectations at 96% but trailed consensus at 59% of FY18 forecast.

Earnings revision

We raised our FY18F/FY19F/FY20F earnings by 31%/37%/38% as we raised our expectations for the sensors business. Management also guided for the LED laser headlamp product to contribute to earnings in the near to medium term. We also revised our US$/RM assumption to reflect the Ringgit weakness.

Upgrade to HOLD, higher TP of RM2.50

We upgrade our call to HOLD and roll our valuation 1-year forward to FY19. This led to our TP increasing to RM2.50 (from RM1.33) which is derived based on GGM formula which implies a fair EC/IC multiple of 8.6x (WACC: 7.5%, g: 3%). We turn positive on its prospects; while high reliance on a key client for the sensors business (ie. over 40% of total sales) poses a risk, its plan to grow the LED segment could mitigate this risk while providing structural earnings growth for the company going forward.

Source: BIMB Securities Research - 31 Oct 2018