Globe’s 1Q19 results were seasonally weaker with net profit falling 80% qoq. However, it was also lower by 74% yoy, impacted by weaker demand for its customer’s end products. We believe, nevertheless, that sensor volumes will improve in the months ahead, as production gears up for this year’s model launch. Higher installed capacity for both the light and gesture sensors will be the key driver of Globe’s 2019E 23% EPS growth. New product introductions (in 2H19) and higher production volumes for its automotive laser headlamp segment would be key rerating catalysts. Maintain BUY and 12-month TP of RM2.55.

Seasonality Takes a Toll on 1Q19 Earnings

Globe’s 1Q19 core profit of RM4m was 80% lower compared to 4Q18, largely impacted by a combination of softer demand for its sensors due to seasonality and lower volumes for its timing device business. However, there is a strategic decision to gradually exit from the latter business, which would eventually see further contractions in the quarters ahead. The timing device business accounted for c.23% of 1Q19 revenue (4Q18: 30%), and we expect the introduction of new products by 2H2019 to make up for the revenue slack. The impact to earnings should be minimal, in our view, considering that most of the volume reduction would be due to Globe exiting a non-profitable business.

Sensor Business Weaker in 1Q19 as Expected, a Pick-up Likely in 2Q

For the sensor business, production volume declines have become the norm post the Christmas holiday season although on a more positive note, the gesture sensor volumes have remained robust due to increasing demand for its end customers’ wireless headphone sets. We understand that installed capacity for gesture sensors will further increase in April and again by midyear. Light sensor volumes are projected to recover only by mid-year, once production commences for this year’s model launch. There is strong visibility for both these sensors given that they have been designed into the next generation models.

Reaffirm BUY and Target Price of RM2.55

We maintain our Buy rating and 12-month TP of RM2.55 based on a 2019E PER of 20x. Globe remains one of our top sector picks for its steady earnings growth and attractive dividend yields of 6-7%. Downside risks: weak demand for its customers’ products, loss of customers and a sharp appreciation of the Ringgit.

Source: Affin Hwang Research - 2 May 2019