Globe’s 3Q17 results were its strongest quarterly performance since 3Q15. Revenue and earnings were close to its peak quarterly performance aided by the commercial production of the light sensor. Notably, the 27.8% EBITDA margin in 3Q17 represented a sharp 7ppt qoq improvement, driven by the increased revenue derived from the sensor business. With better utilisation rates on even higher capacity in 4Q17 (9M17 capex of RM95m vs RM45m as at 1H17), earnings momentum should be even stronger. Maintain our BUY rating and TP of RM8 (based on 20x 2018E EPS).

3Q17 Net Profit Jumps 77% Qoq

Globe’s 3Q17 results were its strongest since 3Q15 with revenue and profits returning close to peak levels, when revenue from the sensor business was more significant. The 38% qoq improvement in revenue comes from a further ramp up of the light sensor, which achieved 30m units per month in September (7m units in June). Despite the 118% qoq increase in depreciation, earnings jumped 77% qoq to RM14m. Importantly, EBITDA margin has recovered to 27.8% (+7.1ppts qoq) which was close to the level just prior to the slowdown in the sensor business in 2016. Effective tax rate for 3Q17 has also declined to 10.5%, a reflection of the higher contribution from the sensor business, which enjoys tax incentives.

9M17 Earnings Within Expectations

Cumulatively, 9M17 core net profit of RM28m (+24% yoy) accounted for 46% and 51% of our and street 2017E estimates. We deem this to be in line with expectations, in anticipation of an even stronger quarter in 4Q17 amidst higher utilisation levels for the light sensor and new capacity coming on stream for both the light and gesture sensors.

Maintain BUY and Target Price of RM8

The solid set of 3Q17 results reinforces our strong positive conviction on the stock. Earnings momentum should remain strong in the quarters ahead, on the back of new installed capacity, both for its light and gesture sensors. Looking ahead, we believe that Globe should continue to see strong structural earnings growth, as it rides on its solid relationship with its Austrian customer, which has also incidentally guided for a robust quarter ahead. Maintain our BUY rating and TP of RM8 (based on 20x 2018E EPS). Key risks to our call would be a loss of customers or lower than expected demand for its end customer’s smartphones.

Source: Affin Hwang Research - 1 Nov 2017