Sensor volumes were weak in 1H18. Despite this, we forecast a 74% YoY growth in sensor volumes in 2018. Weak sensor earnings likely to have troughed in 2Q18. Reaffirming Buy call and 12-month TP of MYR2.64

Softer Sensor Volumes in 1Q18, Likely to Have Bottomed in 2Q18

After strong volume growth in light sensors since the company began production in mid-2017, Globe experienced a slowdown in light sensor volume beginning in March 2018 as a result of weaker-than-expected demand from a major smartphone brand. This contributed to the 36% QoQ contraction in its 1Q18 earnings. 2Q18 will likely see further sequential decline in earnings as inventory was further wound down, although this will also likely be the trough in earnings on a quarterly basis. Order visibility for the next 2 months (July-August) is pointing towards a recovery, in tandem with its end-customer’s launch of a new phone line-up in 3Q18.

Adding Light and Gesture Capacity for 2H18

Despite the volume softness, management has undertaken capex for light sensor equipment comprising automated optical inspection machines, wire bonders, die attach machines and encapsulation equipment, totalling MYR23m. This should expand light sensor capacity by 24% to 46m units per month (from 37m units previously) by July/August 2018. Likewise, capacity for the gesture sensors will also be increased by 3m units to 14m units to cater for additional demand for an end-customer’s wireless headphone earbuds.

Strong Sensor Volume Growth Despite Weak Start

While we expect a weaker 1H18 in comparison with 2H18, we nevertheless forecast 74% YoY growth in the company’s sensor volume unit production for 2018. This is the key driver of our forecast for 67% YoY net earnings growth for 2018E.

Maintain BUY and RM2.64 Target Price

Globe’s share price has declined in tandem with its peers in the supply chain on inventory adjustment. With earnings likely to trough in 2Q18 and better earnings delivery in 2H18, we remain positive ahead of a potentially significant earnings recovery in the quarters ahead. We reiterate our Buy call and 12-month TP of MYR2.64 (based on 20x 2018E EPS). Key risks: loss of key customers, weaker-than-expected demand for its endcustomer’s products, and a sharp appreciation of the MYR.

Source: Affin Hwang Research - 28 Jun 2018