We came away from the group’s 4Q14 results briefing with our POSITIVE conviction reaffirmed by its resilient earnings prospects premised on: (i) production ramp-up for high margin products (namely HD leaded, MLP and turnkey test), (ii) foray into new segments such as LGA & FBGA market for the low cost smart phones from China, and (iii) MEMS-based sensors for Automotive. We see these strategic product mixes, which give a balanced exposure of cyclical segments and defensive segments to augur well for the current tech upcycle as well as the upcoming tech wave. Post-results, our FY15 earnings estimates have been notched up by 5% for house keeping purposes. We are reiterating our OP recommendation with a higher TP of RM6.72 (from RM6.03) as we have switched our valuation method from PBV valuation to PER valuation given its earnings visibility as well as the progressive improvement in its earnings. Our TP is based on a targeted FY15 PER of 17.0x, a valuation which is broadly in line with its closest peers (at its average 4-year forward PER).

Further details on 4Q14 results. Despite the flat 4Q14 revenue which was partly dragged down by the exit of its stamped Leadframe business (c.5% of total group revenue), core PATAMI improved by leaps and bounds (c.2x), underpinned by higher margin products and improved asset utilisation. Overall, its utilisation rate remains healthy at c.80%. On a closer look, in terms of segmental revenue breakdown, the Smartphone/Tablets (S/T) segment still maintains its lion share of 35% (+1ppts YoY), along the shrinking market share in the Feature Phones segment (-5ppts to 8% in 4Q14) with consumer preference shifting to the S/T. Meanwhile, the portion of contribution by the Automotive is inching up slowly (+1ppts to 22%) with increasingly higher orders from MEMS-based sensors in the Auto segment. While Industrial segment remained relatively unchanged (at 22%, the PC segment had recovered (+2ppts to 13%) from a low base amidst the bleak macroeconomic backdrop a year ago.

Healthy development on its product portfolio. We see few catalysts emerging from the current development of its S-Site, M-Site and Suzhou plant. For its S-site which is currently focusing on test and MLP, the group is currently ramping up its volume production on 802.11ac FEM to gear up for a major phone release by fall season.

Meanwhile for its M-site which is mainly focusing in the Automotive sensors, the volume production has started picking up for MEMs impact pressure sensor and wheel speed sensors for the Auto segment. On the other hand, regarding the foray into low cost Smartphone with LGA and FBGA, new LGA design has started with a low volume production while FBGA product line is in qualification stages. We see all these developments, which support our earnings growth basis to give a balanced exposure in cyclical segments (S/T, currently at 35%) and defensive segment (Automotive: 22%). This, we opined, augurs well for the current tech upcycle and the cyclical correction.

Other updates. Management has guided a RM50m capex per quarter averagely, totalling to about RM200m in FY15. We see this as a good sign of management being optimistic on its outlook given the prudent capex (FY13: RM97m and FY14: RM72m) during the gestation period.

Source: Kenanga