Formosa Prosonic Industries Bhd
(Jan 17, RM1.77)
Maintain buy with an unchanged target price (TP) of RM2.32: We had a short meeting with Formosa Prosonic Industries Bhd last week with 11 fund managers and analysts from the buy side and walked away on a positive note. Below are the key takeaways from the meeting.

Management’s commentary was constructive on hitting 15% revenue growth in financial year 2019 (FY19), underscored by the additional 20% capacity contribution from audio segment production.

The new plant rolled out earlier than expected in early December 2018 was built to cater for the new contract win from its existing largest customer. The new contract will take up 70% to 80% of the new plant’s capacity. The remaining capacity will be used to broaden its scope of service, including original design manufacturer orders to strengthen its position in the market as a contract manufacturer.

Roland (Formosa Prosonic’s existing customer) is currently renting two plants from Formosa Prosonic for in-house production. Formosa Prosonic will have a third plant to offer Roland for rental by June 2019, as the latter is looking to ramp up production capacity.

We believe Roland may be looking for opportunities to relocate some production lines from China and Indonesia to Malaysia for cost optimisation. If this materialises, there will be a higher demand of Formosa Prosonic’s musical instrument components from Roland, providing an upside to earnings.

Its fourth quarter of FY18 (4QFY18) results are expected to be released on Feb 22, 2019. We are expecting Formosa Prosonic to post earnings per share (EPS) of four sen in 4QFY18 with sales increasing by approximately 8% year-on-year (y-o-y) but softer against 3Q, which is usually the strongest quarter.

In terms of earnings before interest, taxes, depreciation and amortisation, we expect it to remain flattish y-o-y at approximately 8% to 9%.

Necessary expansion capital expenditure (capex) was spent in FY18; hence moving forward, this should normalise to approximately RM10 million in FY19 (from approximately RM20 million in FY18).

With the absence of bulky capex moving forward, and its strong net cash position of 56.2 sen per share (as of 3QFY18), we opine Formosa Prosonic is in a good position to pay out a higher dividend in FY19. According to our forecast, we expect the group to pay out 11 sen per share in FY19 (dividend yield of 6.4%).

Formosa Prosonic was newly classified as a syariah-compliant security on Nov 29, 2018. With its current low institutional holding, we view this as a plus point, as buying opportunity is now open to more funds.

We continue to like this company for its niche position owing to its focus on audio components and musical instrument parts. We also like Formosa Prosonic for its: i) ongoing expansion plans; ii) strong balance sheet (net cash per share of 56.2 sen or 35% of market capitalisation); iii) generous dividend yield of 5.5%; and iv) synergic partnership with a global electronics manufacturing services leader (Wistron). — Hong Leong Investment Bank Research, Jan 17

《資匯》獨家專訪FPI 《2大因素前景看好 台灣聯友今年再尋突破》

4 Reasons to invest in FPI (Insider Asia)

Growth + Net Cash + Dividend = the DNA of FPI (Harry)

FPI core product's market size grow more than 24% CAGR by 2021 (Technavio)

FPI - Company Evaluation Report (赤資本 Cerise Capital)

FPI tuned in to upbeat musical instruments market (Focus Malaysia)

FPI - Sound of Music (CIMB's Walter Aw)

FPI 2017Q4 profit increase 338.61%

FPI - Sonic boom (HLIB initiate coverage with BUY rating with TP of RM2.19)

FPI - HLIB maintain BUY rating with higher TP of RM2.32 ~Singing a higher chord than expected~

FPI - Hearing the Glorious Symphony