Period a 2Q14

Actual vs. Expectations  Above house expectation. The group recorded 2Q14 normalised net profit (NP) of RM10.8m (vs. core net loss of RM3.5m in 1Q14), bringing its 1H14 core NP to RM7.3m against our and consensus FY14 NP estimates of RM17.7m and RM33.4m, respectively.

 Note that although in percentage term, the 1H14 core NP only made up 41% and 22% of our and consensus FY14 NP estimates, respectively, standard percentage measurement for earnings expectations (for 1H to be at 50%) is not reliable given 1Q14 net loss and better 2H14 earnings expectations.

 We deem the results to be above house expectations as we had previously expected the group to record RM4m in 1H, on the base case assumption of slower gestation period and lower utilisation rate (c.66%). The key positive deviations were: (i) better-thanexpected utilisation rate of c.70%, (ii) faster-than-expected turnaround, and (iii) better cost management.

Dividends  No dividend was declared as expected.

Key Result Highlights

 YoY, 1H14 revenue decreased by 3% with weaker sales seen in all of its segments caused by the termination of non-profitable and ageing products in conjunction with the group’s focus on high margin products. Of noteworthy, the weaker revenue was also dragged down by the European segment which reported a substantial drop from RM5.5m to mere RM0.2m revenue following the cessation of its business operations in Dec 2013. On the flip side, with these rationalisation exercises, the group managed to turn around at its adjusted NP level with a breakeven amount of RM7.3m (>100%), vs. 1H14 adjusted LBIT of RM13.4m.

 QoQ, its 2Q14 revenue increased by 11% which was due to normalisation from the low base in 1Q14 as well as higher utilisation rate. Positively, the group also managed to record a huge turnaround of RM10.8m core NP (with no one-off item being booked) vs. core net loss of RM3.5m in the 1Q14. Management attributed this to the low-hanging fruits after the gestation period and higher utilisation rate of c.70% which was on the back of strong demand from Smartphone, Power Management and Internet-Of-Things. (vs. c.60% in 1Q14). Meanwhile looking at the normalised EBIT margin; with higher operational efficiency and better product mix, it improved by leaps and bounds to 6.9% vs 0.8% in 1Q14.

Outlook  Management continues its optimistic tone on the group’s 3Q14 outlook, to be underpinned by strength in demand of Automotive, Power Management and Smartphones following its successful turnaround after the gestation period.

Change to Forecasts Post-results, we have increased our FY14-FY15 NP estimates by RM10.9m-RM17.8m to RM28.6m and RM44.0m following our results numbers update, higher utilisation rate assumption and lower cost of sales. Note that our earnings estimates are at 14-27% discount from the consensus’ numbers.

Rating Upgrade to MARKET PERFORM

Valuation  Post-results, we increase our TP to RM1.64 (from RM0.86) as we rolled forward our 0.6x FY14 PBV valuation to a higher targeted 1.1x FY15 PBV (close to average 3-year mean forward PBV, from previously -1.0SD band) due to better earnings outlook.

Risks to our call Lower-than-expected sales and margins.

 Weaker consumer sentiment.

Source: Kenanga