1Q18 results were broadly in line with expectations accounting for 18%/20% of our and street’s full-year estimates. As expected, earnings momentum was weaker sequentially. Earnings will likely further contract in 2Q18, due to weaker volume loadings for light sensors in order to clear excess inventory. Despite this, we still expect Globe to deliver a robust 67% earnings growth in 2018E, once the production volume of light sensors normalises in 2H18 in tandem with its client’s new smartphone model launch. Given the 40% pull back in the share price over the past 3 months, valuations are looking attractive at 13x 2018E EPS while dividend yield at 7% is also compelling. Maintain BUY.

Softer 1Q18 Revenue and Earnings

Sequentially, Globe’s revenue and core profit of RM87m and RM16m were lower due to softer volume loadings for its sensor business, particularly for light sensors, which saw volumes shrinking particularly in March 2018. This coincided with the scaling back of excess inventory in the supply chain, due to weak demand for its end customer’s smartphones. The appreciation of the RM against the US$ further compounded the weak revenue and hence earnings.

Results Within Expectations

Against our 2018E net profit forecast, results were largely in line with expectations. 1Q18 core profit of RM16 (+205% yoy) accounted for 18% of our 2018E estimate (20% of street’s). The strong earnings growth yoy was largely due to the low base in 2017, prior to the commercialisation of the light sensor. 1Q18 EBITDA margin was also higher (+8.6 ppts yoy), underpinned by revenue growth and higher contribution from the sensor segment, which is estimated to account for 55% of revenue in 2018E (36% in 2017).

Maintain BUY and Target Price of RM6.16

Earnings momentum will likely remain weak for another quarter before the light sensor volume normalises in 3Q18. We nevertheless leave our forecasts unchanged as we have already factored the slowdown into our model. We maintain our BUY rating and TP of RM6.16 (based on 2018E PER of 20x). Rerating catalyst for the stock includes new sensor product wins that have not been factored into 2018E earnings by the market. Key risks to our call would be a sharp appreciation of the RM, a loss of customers or lower-than-expected demand for its end customer’s smartphones.

Source: Affin Hwang Research - 25 Apr 2018