• 2QFY19 core earnings fell 21% yoy to RM58m on lower volume loading for a key customer in Singapore.

• Qoq, core earnings grew 3% despite declined in revenue. EBITDA margin improved 330bps to 28.3% from 25.0% on the back of better cost management.

• Overall, 1HFY19 core earnings were ahead of ours but inline with consensus estimates at 60% and 48% respectively. No change to forecasts amidst tough outlook for RF testing.

• Declared 1.5sen dividend (YTD: 3.1sen), implying an 82% payout.

• While recent share price correction has mostly reflected its earnings risk, outlook for the RF segment remains tough, in our view. Upgrade to HOLD with a RM1.45 TP which values the stock at 24x FY19F PE. Sell on strength.

Lower volume loadings from key customer

2QFY19 core earnings fell 21% yoy to RM58m in tandem with 20% revenue decline. This was due to lower volume loading from sensor and RF testing products; volume loadings for its key customer in Singapore (represents c.70% of revenue), fell 25%. Against expectations, 1HFY19 core earnings were above ours at 60% but broadly inline with consensus at 48%.

EBITDA margin improved

On qoq basis, 2QFY19 core earnings grew 3% despite 8% dropped in revenue. This was underpinned by lower net opex which led to EBITDA margin expansion of 330bps to 28.3%.

Cautious outlook

Despite 1HFY19 earnings running of our forecast, we make no changes to our earnings. We expect earnings in 2HFY19 to remain tepid following unfavourable outlook for its RF testing business. This is on the back of softer sales growth expected for non-android smartphone sales in 2019. We expect earnings from the manufacturing of miniLED with OSRAM to improve, riding on rising global demand for fine-pitch display. However, volume remains relatively low compared to the RF segment.

HOLD at TP of RM1.45

We upgrade our call to HOLD (from SELL) with a TP of RM1.45 (WACC: 9%, long term growth rate: 5%). We believe recent share price correction has largely reflected the earnings risk for the RF business.

Source: BIMB Securities Research - 22 Feb 2019