Globe’s 3Q18 results were a sharp improvement with core net earnings growing by 169% qoq and 62% yoy, underpinned by improved utilisation levels for its sensor products particularly the light and gesture sensors, which are high-volume products accounting for >85% of total sensor production volume. Due to the improved product mix, 3Q18 EBITDA margin hit a record high of 38.2% (+10.4ppts yoy) and this is likely to be sustained in 4Q18. Nonetheless, earnings fell short of our expectations accounting for 54% of our full-year forecast (62% of consensus). Hence, we cut our EPS estimates and TP to RM3.00. Maintain BUY.

3Q18 EBITDA Margin Hits a Record High

Globe’s 3Q18 EBITDA margin jumped 16.9ppts qoq to a record high of 38.2% on the back of higher contribution from the sensor division. Meanwhile, there was a decline in volume for the proximity sensor, an older product which is on partial turnkey, resulting in lower revenue contribution but at the same time lower overall operating cost (-3.6% qoq). We estimate that production volumes for the sensor division were up >70% qoq and >50% yoy in 3Q18 and that volumes are likely to be sustained in 4Q18 as production ramps up to meet the launch of its end customer’s product.

9M18 Core Net Profit Up 73% Yoy, But Below Our Estimate

Cumulatively, core net earnings of RM47.9m (+73% yoy) accounted for 54% of our full-year 2018 forecast. The variance lies in lower-than-expected revenue and profitability although it is worth noting that margins have remained on an upward trajectory since bottoming in 2016. The push towards the sensor business continues to drive margin expansion due to the better profitability from this segment. We estimate that the sensor division will account for 51% of revenue in 2018E from 36% in 2017, leading to a 6.4ppts yoy uptick in the 2018E EBITDA margin.

Maintain BUY But With Lower Target Price of RM3.00

We cut our 2018-20 EPS estimates by 10-16% to account for the weakerthan-expected revenue, and lower the 12-month TP to RM3.00 (based on an unchanged 2019E PER of 20x). Nevertheless, Globe remains a BUY. Despite softening smartphone sales, Globe has successfully grown the number of its sensors in its end customer’s products, a key driver of its earnings. Key risks to our call would be a sharp appreciation of the RM, a loss of customers or lower-than-expected demand.

Source: Affin Hwang Research - 31 Oct 2018