• 1Q21 Results Accounted for 17% of Our Forecasts – in Line
• But We Tone Down Our Expectations on New Sensor Design Wins
• Earnings risk will be a major overhang over the near term. Premium valuations hard to justify; downgrading to HOLD with a lower TP of RM2.35 based on its 5-year mean PE

1Q21 Dragged by Seasonality

1Q21 core profits fell a sharp 41% sequentially due to seasonal weakness, which resulted in an estimated 16% decline in sensor production volume, across both its high volume light and gesture sensor products. Due to the contraction in this high-margin sensor business, EBITDA margins fell 10.7ppts qoq to 36.7%, although this is still within our full year expectations.

17% of Our Previous Forecast, Results Were in Line

1Q21 core earnings increased 17% yoy despite the 3% revenue increase driven by the improved revenue mix. Sensors accounted for 60% of revenue compared to 55% in 1Q20, which aided the 2.4ppt yoy EBITDA margin improvement. Overall, no major surprises in a typically weak quarter, although 1Q earnings only accounted for 17% of our full-year forecast.

Downside Earnings Risk Is a Possibility

However, the recent uncertainty caused by the possible loss of one of the sensors by its customer in the 2021 US smartphone brand’s new model has raised doubts whether the remaining sensors including Globe’s light sensor would see a similar fate. While management has guided that they are still working on the next generation model for this product, there is always a possibility of a late U-turn. Likewise, we suspect that any new sensors that Globe would be qualified for in 2021 are unlikely to be a high volume runner, judging by the narrowing window between capex investment and production commencement, whereby production typically starts mid-year in preparation for the 3Q launch.

Downgrade to HOLD, TP Cut to RM2.35

We cut FY21-23E EPS by 14-17% after we reviewed our sensor production assumptions. Because of the weaker growth profile and uncertainty overhang, we downgrade Globe to a HOLD, pegging valuations to its 5-year mean PE of 28x 2021E EPS instead of at +1SD before. Key upside/downside risks include weaker/stronger-than-expected demand for its customers’ products, gain/loss of business; and a stronger/weaker RM/US$.

Source: Affin Hwang Research - 28 Apr 2021