We came away from the group’s 3Q14 result briefing feeling POSITIVE with its resilient earnings prospects which are premised on: (i) production ramp in high margin products (namely HD leaded, FBGA market for the low cost smart phones from China and MEMSbased sensors for Automotive, and (iii) higher operational efficiency after the line consolidation and product rationalisation. Post-briefing, although we have trimmed our FY14 and FY15 earnings estimates by 2% to 6% to mainly account for higher electricity cost following the recent tariff hike, this does not hinder our POSITIVE conviction given its resilient outlook as well as its attractive potential net dividend yield of c.5% in FY14 and FY15, which should appeal to investor seeking refuge in the tech space. We are reiterating our OP recommendation with a higher TP of RM5.23 (from RM4.68) as we roll forward our valuation basis year from FY14 to FY15. This is based on a higher targeted FY14 PBV of 1.3x (from 1.2x, up by a 0.5 notch from the +0.5SD above three-year forward PBV to +1.0x SD above its average three-year forward PBV), which also implies 14x FY15 PER.

Further details on 3Q14 results. While 3Q14 revenue inched up 2% QoQ on new products (eg. MEMS-based sensors in the Auto segment) which offset the seasonal weakness, adjusted EBIT margin was compressed by 1.1ppts to 5.5% due to the higher electricity cost (of extra c.RM2m) as well as the initial start-up cost incurred in Suzhou. On a closer look in terms of segmental revenue breakdown, the Smartphone/Tablets (S/T) segment still maintain its lion share of 34% (+1ppts YoY), along the shrinking market share in the Feature Phones segment (-6ppts to 8% in 3Q14) with consumer preference shifting to the S/T. While the portion of contribution by the Automotive (+1ppts to 23%) and Industrial segment (flat at 22%) remained relatively unchanged, the PC segment (+4ppts to 13%) had recovered from a low base amidst the bleak macroeconomic backdrop a year ago. Overall, its utilisation rate still remains healthy at c.80%.

Solid earnings momentum in the making. Management believes that the upcoming 4Q14 could see a solid earnings rebound mainly underpinned by: (i) its new MLP for FEM devices and AMOLED screen driver ramp for the latest smartphones, (ii) its new MEMS for the production ramp in MEMS based sensors for the Automotive segment (mainly for the pressure monitoring system and impact pressure sensor) and (ii) test hub consolidation into Carsem. While the momentum of S/T segment’s growth rate has temporarily slowed down, the silver lining will be the LGA and FBGA for the low cost smartphones which has just started to gain traction. Management indicated that they will incur CAPEX of RM45m each in the 4Q14 and the subsequent quarter which we believe could translate into a mid-teen sequential growth at the top line and better earnings in FY15; which we have already factored in our estimates.

Other updates. On the Amkor Patent Litigation update, while we gather that the hearing is still ongoing, we are not overly concerned with the final outcome as we gather that the MLP involved in the designs infringement found by the ITC only contributes less than 2% to the group’s revenue.

Our take post briefing. Although we have trimmed down our earnings estimates by 2% to 6% to account for the higher electricity cost following the recent tariff hike, this does not hinder our POSITIVE conviction given the resilient earnings outlook as mentioned above as well as its attractive potential net dividend yield of c.4% in FY14 and FY15. We are reiterating our

OP recommendation with a higher TP of RM5.23 (from RM4.68) as we roll forward our valuation basis year from FY14 to FY15. This is based on a higher targeted FY14 PBV of 1.3x (from 1.2x, up by a 0.5 notch from the +0.5SD above three-year forward PBV to +1.0x SD above its average three year forward PBV), which also implies 14x FY15 PER.

Source: Kenanga