• 3Q20 earnings surged on recovery post lockdowns. Sensor volume jumped 36% qoq as production of the light and gesture sensors picked up pace
• 9M20 results within expectations. But we raise 2021-22E EPS by 15-18% to take into account encouraging demand for its end customer’s new smartphones
• Upgrade to BUY With a Higher TP of RM3.69

3Q20 Core Net Profit Jumps 345% Qoq

Sensor production volumes were much higher in 3Q20, up an estimated 36% qoq and hence contributing to the better performance. Contribution from timing devices was also better as this business faced some challenges in 2Q20, a result of the lockdowns. Overall, core profit jumped >4-fold qoq on the back of the better revenue and EBITDA margin (+16.6ppts qoq). Despite the 29% yoy growth in sensor volumes, 3Q20 core profit was however only 4% higher than a year ago, attributed to the lower contribution from the timing device segment and negative impact from the earlier lockdown.

9M20 Core Profit Higher by 9% Yoy, Within Expectations

Despite the 5% yoy revenue growth in 9M20, core profit was up 9%, driven by margin improvement and a lower effective tax rate. Overall, 9M20 results were within expectations, accounting for 59% and 60% of our and street 2020E estimates. We expect the strong 3Q20 performance to sustain into 4Q20 on seasonally stronger sensor production volumes.

Upgrade to BUY With Higher TP of RM3.69

With strong anticipated demand for its end customer’s new smartphones and potentially attractive bundling strategies for their wireless headsets, there could potentially be upside risk to the sensor forecasts going into 2021. We raise our 2021-22E EPS forecast by 15- 18% as we take into consideration current excitement over the new phone. Our forecast has however yet to incorporate any new sensor design wins into the 2021 smartphone models. Contribution from the automotive laser light business should also gather pace in 2021 as constraints on raw material supply in 2020 improve. At a more macro level, we are of the view that investors may remain focussed on growth themes and as such PE multiples to remain elevated, given the scarcity of growth stocks. We upgrade the stock to a BUY (from HOLD) with a higher TP of RM3.69 (from RM2.26) based on a target 2021E PE of 36x or +1SD above its 5-year mean. Key downside risks include weakerthan-expected demand for its customers’ products, loss of business; and a stronger RM/US$.

Source: Affin Hwang Research - 28 Oct 2020