• 1QFY19 core earnings fell 21% yoy to RM56.8m on lower volume loading for sensor products to trail ours and consensus forecasts at 19% respectively.

• We cut our earnings for FY19-20F between 18-21% on softer demand for RF testing business. However, we are still positive on the optoelectronics business which is 25-30% of revenues.

• We believe recent share price correction has more than reflect its earnings risk. Upgrade to BUY with a lower TP of RM1.95 which implies FY19F PE of 24x before easing to 22x in FY20F.

Dragged by sensor product

1QFY19 core earnings fell 21% yoy to RM56.8m in tandem on lower volume loadings from major sensor products. This was driven by an 8% revenue decline from the Singapore market which represent c.79% of total sales contribution. However, PBT margin improved slightly by 0.2ppts to 18.5% on better product mix and favourable forex. Overall, 1QFY19 core earnings were below ours and consensus estimates at 19% respectively.

Supported by launch of new smartphone models

On qoq basis, 1QFY19 earnings surged 81% on 18% increase in shipment volume to the Singapore market. We believe this could be due to the slew of new smartphone model launches during the 3QCY18 (Jun-Sep) period.

Dividend declared

First interim dividend of 1.6sen (1QFY18: 2.3sen) was declared, implying an 84% payout. Our FY19 DPS forecast is based on 68% payout assumption.

Cautious outlook

We cut our earnings forecast for FY19-21F by 18-21% on the back of softer demand for RF testing business. This is largely due to the moderate outlook for smartphone sales amidst longer replacement cycle. Still, we are positive on the optoelectronics business (ie. iris scanner) which still makes up in c.25-30% of revenues as we expect demand for the product would pick up over the broader consumer segment.

Upgrade BUY at lower TP of RM1.95

Upgrade to BUY (from HOLD) with lower RM1.95 TP (from RM2.17). We believe the recent share price correction have fairly reflected the earnings risks for the RF business.

Source: BIMB Securities Research - 27 Nov 2018