Globe’s 1H19 core profit of RM11.6m (-53% yoy) accounted for 16% of our 2019 forecast and was below expectations. 1H19 revenue was lower by 42% yoy largely due to contraction in the timing device business and a change in product mix for its sensor business. Sensor production volumes, while expected to accelerate from 2H19, are being led by the lower-ASP gesture sensor vis-à-vis the light sensor. We cut our FY20- 21E EPS by 14-16% and also lower our target PE multiple to 16x (from 20x previously) taking into consideration the higher risk to earnings given the potential negative impact from the trade tensions. Downgrade to HOLD from Buy, with a lower 12-month TP of RM1.74.

1H19 Results Weaker Yoy, Below Expectations

1H19 core net profit of RM11.6m (-53% yoy) accounted for 16-19% of our and the street’s full-year estimates. While we still expect earnings to be seasonally stronger in 2H as sensor production volumes recover, the results are below expectations due to a weaker-than-expected sensor contribution. While we estimate that 1H19 sensor volumes are higher yoy, the adverse impact from the change in product mix is larger than expected, resulting in the lower contribution. We estimate that light sensors account for 40% of 1H19 volumes as opposed to 53% in 1H18, driven by growth in the lower-ASP gesture sensor. However, the 1H19 EBITDA margin has increased 1.5ppts yoy, likely due to revenue reduction from the lower-margin timing device segment.

Contribution From New Businesses May Only Trickle in by 1H20

Globe is undergoing qualification for several products to help fill the revenue loss from its timing device business. While we remain long-term positive on these initiatives, we understand their contribution will only start to really kick in by 1H20, leaving a revenue and earnings void over the near term.

Downgrade to HOLD, Target Price Lowered to RM1.74

We revise our sensor margin and revenue assumptions, leading to a cut in our 2019-21E EPS by 14-16%. We are also lowering our target PE to 16x (-1SD 5-year mean) from 20x, and hence our TP is lowered to RM1.74, to reflect our more cautious stance on its customers’ end demand as the global trade tensions are prolonged. Downgrade to HOLD from Buy. Dividend yields at 4- 5% remain attractive, however. Risks include stronger/lower-than-expected demand for its customers’ products, a stronger/weaker RM/US$ and the speed of qualification of new customers.

Source: Affin Hwang Research - 1 Aug 2019