Globe’s 2018 results were in line with expectations driven by growth in sensor contribution. As the latter also commands better profitability, 2018 EBITDA margin registered a marked improvement (+6ppts yoy). We expect this trend to be sustained so long as the lower margin products are replaced by this higher-margin segment. Should the record-high EBITDA margin of 42.2% (+7.1ppts yoy) in 4Q18 be sustainable, there could be upside risks to our earnings forecasts. Maintain BUY and TP of RM2.55.

2018 Core Earnings Up 31% Yoy, in Line With Our Forecast

Globe’s 2018 core profit of RM69m (+31% yoy) was in line with our expectation, but slightly behind street’s. Although 4Q18 revenue was weak (- 6% qoq, -22% yoy) due to softer sensor production volumes and currency impact, earnings remained relatively stable amidst strong production volumes for its customer’s end products during the final quarter of the year. Due to the seasonality in sensor production volumes and the capex enhancements undertaken over the course of 2H18 for the sensor division, 4Q18 core profit accounted for 31% of full-year 2018 profit. For full-year 2018, Globe’s stronger earnings were largely underpinned by growth in volume at its sensor division whereby both its light and gesture sensors saw higher production volumes yoy. This contributed to the better 2018 revenue (+8% yoy) as well as EBITDA margin enhancement (+6ppts yoy). Contributions from its timing device and LED segment are likely to have remained relatively stable yoy.

1Q19 likely weaker sequentially in tandem with rest of the supply chain

While 4Q18 would be regarded as a relatively strong quarter, we believe that Globe will go through a seasonal slowdown in 1Q19 on the back of weaker sensor production volumes. However, this is consistent with other suppliers within the supply chain and we think that production should once again recover towards the latter part of 2Q19.

Reaffirm BUY and Target Price of RM2.55

No changes to our 2019-20E EPS but we introduce 2021E EPS of 15 sen (+3% yoy). Our 12-month TP of RM2.55 is based on an unchanged 2019E PER of 20x. Maintain BUY on Globe as management team is well regarded while we like its solid earnings track record. We project 23% EPS growth in 2019E on the back of further growth in the sensor business while there is potential upside for its automotive laser headlamp business. Downside risks: weak demand for its customers’ products, customer loss and sharp appreciation of the RM.

Source: Affin Hwang Research - 26 Feb 2019