FY18 core earnings of RM32.2m (YoY: -20.6%) came in below our expectation, accounting for 88% of full year estimate. The disappointment due to higher than-expected depreciation and amortisation and higher operating cost. We reduce our FY19/20 earnings forecasts by 5% respectively. We maintain BUY with a slightly lower TP of RM2.22 pegged to 13x of average FY19-20 EPS.

Below expectation. FY18 core earnings of RM32.2m (YoY: -20.6%) came in below our expectation, accounting for 88% of full year estimate. The disappointment was due to higher-than-expected depreciation and amortisation and higher operating cost.

Dividend. Declared interim dividend of 10sen/share (ex-date: 3rd April 2019) as compared to 8sen/share in FY17. The higher than expected dividend translates to an attractive dividend yield of 5.0%.

QoQ. Despite the stronger USD against RM (4Q18: RM4.17/USD vs 3Q18: RM4.08/USD) revenue declined by 22.4% due to lower sales volume as third quarter usually drives higher sales. Core earnings plunged by 63% to RM5.4m mainly due to higher operating cost where GP margin shrank by -5.6ppt to 8.2%.

YoY. Despite flattish forex (4Q18: RM4.17/USD vs 4Q17: 4.16/USD), 4Q18 revenue rose by 13.5% driven by higher sales volumes and better sales mix. However, core earnings turned unfavourable and declined by 57% due to higher operating cost environment.

YTD. Despite weaker USD against RM (FY18: RM4.03/USD vs FY17: RM4.3/USD) FY18 revenue surged by 21.2% due to higher sales volume from both audio and musical instrument segments. However, the higher revenue translated to lower core earnings of RM32.2m. This was due to the higher cost environment including (1) higher labour cost (newly implemented foreign labour levy) which was effective 1 Jan 2018; (2) higher raw material cost (PCB shortages in the market); (3) higher R&D cost; and higher effective tax rate (FY18: 19% vs FY17: 14%).

Near term earnings visibility still intact. Management is still constructive on hitting 15% revenue growth in FY19 underscored by the additional 20% capacity contribution from audio segment production. Furthermore, Roland (FPI’s existing customer) is currently renting 2 plants from FPI for in-house production. FPI will have a 3rd plant to offer Roland for rental by June 2019, as the latter is looking to ramp up production capacity. If this materializes, there will be a higher demand of FPI’s musical instrument components from Roland, providing an upside to earnings.

Forecast. We reduce our FY19/20 earnings forecasts by 5% respectively mainly to account for lower GP margin and higher D&A. We maintain BUY with a slightly lower TP of RM2.22 (previously RM2.32) pegged to 13x of average FY19-20 EPS. We continue to like FPI for its (1) ongoing expansion plans; (2) strong balance sheet (net cash per share of 67.8 sen or 34% of market cap); (3) generous dividend yield of ~6%; and (4) synergic partnership with global EMS leader (Wistron).

Source: Hong Leong Investment Bank Research - 22 Feb 2019