INVESTMENT MERIT

- Solid earnings track record with consistent dividend payout of >50%. Globetronics Technology (GTB), one of the outperformers in the semiconductor industry, has remained profitable for more than a decade (with 10-year CAGR of 7%) despite the cyclical nature of the industry. It has also consistently been paying out dividends at >50% dividend payout ratio (DPR) given its strong cash position as well as its relatively stable income generation profile. Over the past 10-year period, GTB has transformed itself from a traditional semiconductor components manufacturer (previously with main focus on IC burn-in services) to a niche electronics components manufacturer with main focus on LED, Crystals Timing devices and Sensors, which are currently in high demand. Currently, its major customers include Epson Toyocom, Cree, Avago, ST Microelectronics and OSRAM which are the leading semiconductor players in the world.

- New sensors products to be the key growth driver going forward. Since GTB started to supply its new products- proximity sensors (to be used to extend battery life in smartphones and tablets) to a Swiss customer back in 2012, its bottom-line improved by 55% YoY thereafter on the back of new increased capacity, stable growth across other products coupled with the higher EBITDA margin contributed by proximity sensors. We understand that there is also strong sales order visibility from this new product, at least for the medium term, as the Swiss customer has committed orders with GTB. Positively, GTB is also negotiating with a major US-based customer to supply its proximity sensor products. We are projecting a 2-year NP CAGR of 21% for GTB on the assumption of higher contribution from its sensor products as well as sustainable growth in its Timing Devices and LED segments amid the recovery of the semiconductor industry.

- Strong balance sheet and net cash position to support its minimum 50% dividend payout policy. The group is in a net cash position of RM131m as at 1H2013. We understand that GTB intends to maintain a minimum DPR of 50%. If we were to conservatively take a lower end DPR of 72%, based on its latest 3 years historical DPR (ranging from 72% to 85%), this will come up to a FY14E DPS of 15.0 sen, translating into a decent dividend yield of c.5%, based on our FY14E EPS.

- Potential fair value of RM3.42. We value the stock at RM3.42/share @ 16.0 x FY14 PER, which is at a +2SD level above its 3-year average forward PER as we view that its: (i) earnings stability, which makes it less vulnerable to the semiconductor cyclical volatility, (ii) robust FY12-FY14E NP CAGR of 21%, and (iii) rising exposure to the booming S&T segment, should deserve a premium valuation. TRADING BUY.

SWOT ANALYSIS

- Strength: Stable earnings despite industry cyclical downturn

- Weaknesses: Smaller operational size compared to its peers

- Opportunities: Increasing demand for smart devices

- Threats: Slower smartphone and tablet sales

TECHNICALS

- Resistance: RM3.13 (R1), RM3.30 (R2)

- Support: RM2.90 (S1), RM2.80 (S2)

- Comments: GTRONIC’s overall uptrend remains intact, although the MACD is starting to show signs of bearish divergence. To this respect, any upside would likely be a sluggish grind higher while a crucial downside to watch is RM2.90. Should the RM2.90 support be violated, GTRONIC could in fact extend its decline to RM2.80 and possibly RM2.60 Next.

BUSINESS OVERVIEW

Globetronics Technology Bhd (GTB) is an assembly, packaging and testing company in the semiconductor/electronics industry based in Penang. The company provides a variety of products & services which include Semiconductor, LED, Encoder & Sensor, Quartz Crystal & Timing Devices, Chemical & IDM Supplier and also IT solutions & services.

BUSINESS SEGMENTS

The group's businesses are mainly categorised into the manufacturing, assembly, testing and sales of integrated circuits, small outline components, high power LED wafers, LED components, encoder and sensor devices, timing and quartz crystal devices, electrostatic discharge (ESD) protective materials, technical plating services and packaging materials for the semiconductor and electronics industries.

Source: Kenanga