Despite potential earnings hiccup in 4QFY6/18 (mainly due to higher R&D and new platform expenses for new products), we believe the 61% plunge in share price is overdone, supported by undemanding 12.6x FY19 P/E (30% below historical P/E of 18x since listed and 10% discount to its peers), a strong FY18- 20 EPS CAGR of 31% and attractive 5.9-6.6% FY19-20 dividend yields. Downside risk is cushioned by recent USD strength (vs RM), company’s share buy-back mandate and solid net cash ~RM74m or 19sen/share (after deducting the balance of RM14m capex from IPO proceeds).

Riding on the Bluetooth growth. Listed on the ACE market in May 2016 and subsequently transferred to the Main Market in March 2017, SALUTE started as an electronics precision plastic parts and components manufacturer, and now has evolved into a turnkey electronic manufacturing services (EMS) solutions being a vertically integrated player for consumer electronics specializing in Bluetooth devices for external brands (accounts for about 90-95% of revenue), whcih include Plastronics, Jaybird, Sony, Logitech etc. These latest generation Bluetooth-related products include Bluetooth headsets, speakers, smart watches and handsfree car kits.

In-house brand FOBO. The Group also manufacture Bluetooth devices under its own brand, FOBO (For Our Better World), which include security tags, healthcare related products and Tyre Pressure Monitoring System device for vehicles.

Undemanding valuation; negatives likely priced in. SALUTE chalked up a disappointing 3QFY18 results, mainly due to increased research, design & marketing expenses for new products and in-house brand FOBO as well as collaborate design expenses with a European design house to develop world-leading technology for high performance Bluetooth cable-less headset products. Meanwhile, its 4QFY6/18 results is also likely to remain tepid, taking cues from higher R&D and new platform expenses for new products. Overall, we believe the 61% plunge in share price is overdone, supported by undemanding 12.6x FY19 P/E (32% below historical 18.5x P/E since listed and 10% discount to its peers).

Values emerged after a steep plunge in share prices, given its established track record, cheap valuations (refer Fig3), solid balance sheet (net cash of RM74m) and riding on the Bluetooth growth amid rising adoption of media streaming devices, increasing disposable income of consumers and high compatibility of wireless Bluetooth device. We see better performance in FY19-20, premised on more new models coming up from key customers and its close associations with both its existing customers and potential new customers to co-develop and plan a slate of new innovative products and technology offerings over the medium to long term.

More upside following a bullish downtrend resistance breakout. After hitting 52- week low at RM0.455 (30 May), SALUTE has been building higher highs supports before ending at RM0.575. Yesterday’s successful breakouts above congested resistances 30d/50d SMAs (near RM0.54) bode well for short term advance towards RM0.63 (26 June high) and RM0.70 psychological barrier before reaching our LT price target of RM0.775 (14 Mar high). Key supports are RM0.54 and RM0.50. Cut loss at RM0.495.

Source: Hong Leong Investment Bank Research - 25 Jul 2018