SALUTE has recovered >100% following the plunge of 74% after the Covid-19 outbreak. We believe the steady recovery will continue, supported by (i) steady cash pile of RM65.0m (c.30% of market cap) in its balance sheet, (ii) steady dividend paymaster since listing and (iii) 50% workers allowed to work during MCO period. Technically, it is poised for a flag consolidation breakout, targeting RM0.625-0.705-0.78, support at RM0.49-0.52, while cut loss is set around RM0.475.

Weaker results... SALUTE’s earnings have been declining after peaking in FY17 on the back of lower revenue coupled with heavy R&D expenses over the years. However, we believe the recovery could be anticipated in the upcoming years as SALUTE will continue to co-develop hearable devices with its European design partner and expect 2 of its current product development project to achieve its mass production timeline by 4QFY20.

…but dividends maintained supported by solid net cash. Over the past few years, SALUTE has declared 2.4 sen per annum in FY17-19. In FY20, similar structure has been noticed and based on 2.4 sen dividend, it translates to around 4.3% dividend yield. In our view, SALUTE will be able to maintain the dividends given its healthy net cash of RM65.0m (16.8 sen per share or c.30% of market cap) in its balance sheet.

Flag formation breakout in the pipeline. SALUTE has formed a bullish engulfing bar, accompanied by significant increase in trading volume and poised for a flag formation breakout in the near term. With the indicator turning positive, we expect SALUTE to retest RM0.625-0.705, with a LT target of RM0.78. Support is located around RM0.49-0.52, with a cut loss set at RM0.475.

Source: Hong Leong Investment Bank Research - 23 Apr 2020