Globe’s 1Q20 results were stronger yoy, but largely off a significantly lower base last year. Earnings were fuelled by the sensor business which was stronger than the typically softer period a year ago, driven by a new smartphone model launch and also possibly due to inventory build as concerns over supply-chain disruptions mount. Gesture sensor volumes have also risen and account for the bulk of sensor volumes (c.54%). Globe still looks on track to register earnings growth in 2020E, but downside earnings risk is rising, as disruptions in raw material supply are curtailing productivity while the global lockdowns are curtailing new product introductions. Downgrade to Sell.

Better Profitability Yoy Driven by Its Sensor Business

Globe reported stronger earnings likely driven largely by improvement in its sensor segment. Sensor volumes were higher in 1Q20 on a yoy basis driven by better demand for its gesture sensors. Likewise, light sensor volumes were also higher in 1Q20. Both contributed to some 80% of its sensor production volumes. While the timing device business saw lower volumes, improved pricing and cost reductions that were incorporated since mid FY19 have likely enhanced overall profitability in this business. The LED and lighting segment was also lifted by better volumes for its wafer sorting and laser light customers.

2020 Results Broadly Within Expectations

Globe’s 1Q20 core profit of RM9m (+124% yoy) was within expectations. The yoy growth looks exceptionally strong due to the low base in 1Q19. Revenue grew 22% yoy driven by improvement across the sensor and LED segments. This helped operating leverage and contributed to the firmer EBITDA margin in 1Q20 (+10.2ppts yoy). Sequentially, as anticipated, softer sensor volume loadings contributed to the weaker revenue and earnings. 1Q is typically a softer quarter although we think that a new model launch and some concerns of supply-chain disruptions have led to some inventory building in the system.

Downgrade to SELL Despite Higher TP of RM1.43

We leave our forecasts unchanged, expecting seasonally stronger quarters ahead and roll forward our valuation horizon to 2021, lifting our TP to RM1.43 from RM1.34. This is based on an unchanged target PE of 16x, a discount to its 10-year mean PE of 20x to reflect further downside risk to earnings on Covid-19-related supply-chain disruptions and new product launch delays. Nonetheless, we downgrade the stock to SELL from Hold given the valuation. Risks include stronger-than-expected demand for its customers’ products, new sensor products, a weaker RM/US$ and more qualification of new customers.

Source: Affin Hwang Research - 22 May 2020