Local NDR Highlights: Volume Starting to Kick in

We accompanied Globe’s management on a local NDR yesterday, meeting up with over 20 clients (from 15 organisations). The focus was largely on the sensor division and, in particular, the new light sensor, which recently began commercial production. We believe that the meetings were able to quell concerns over the likely strong earnings ramp up in 2H17E. We reaffirm our BUY call and TP of RM8.

Focus Is on the Sensor Division

The focus of the meetings was on the light sensor, which recently went into commercial production (see Fret not, here comes the light, 5 June 2017). Management is targeting production of 10-11m units in June and once equipment is fully installed by mid-June, volumes should be closer to 26m units in July, out of an installed capacity of 31m units. Management guided that the recent equipment purchase order of RM20m, would likely be directed at expanding its light-sensor capacity, lifting monthly capacity to 35-36m units. We previously assumed that the equipment would be directed entirely at the gesture sensor. Capacity for the gesture sensor should, however, rise from the current 7m units/month to 11-12m units.

2H17 Sensor Volumes Will Likely be Double 2015 Peak Production

With a full production run of the sensors, management targets for monthly sensor production to be c.40m units/month from July (light: 26m; gesture: 8m; proximity: 3m; motion sensor: 3m). This is effectively double monthly average sensor production capacity of 20m units in 2015 (proximity sensor alone). With a higher average ASP (c.30% above proximity sensor), we expect this to drive the robust earnings ramp in 2H17E. Nevertheless, we do expect some improvement in quarterly performance in 2Q17, considering the higher sensor-production levels in May/June.

Reaffirm BUY and Target Price of RM8

As the light sensor is a critical component for Globe’s US customer, the risk of a turnabout in the sensor business is small. Near-term headwinds if any, lie on the renewal of the sensor division’s tax incentives, which expire this month, by MIDA. We believe that these will be extended for a further 5 years, considering that management has already met all of the conditions. We reaffirm our BUY call and 12-month TP of RM8.00, based on a 2018E PER of 20x. Risks: customer loss and a sharp appreciation of the Ringgit.

Source: Affin Hwang Research - 8 Jun 2017