Salutica Berhad (SALUTICA) is slated for listing on ACE market today at an IPO price of RM0.80/share. We are recommending a “Trading Buy” on SALUTICA with a FV of RM1.00 based on a targeted PER of 11.0x, a valuation which is broadly in line with its peers. SALUTICA is expected to register a 2-year NP CAGR of 13.5%, underpinned new capacity expansion as well as new products launching amid higher adoption of Bluetooth technology. Meanwhile, dividend payout of >30% is possible in the future could offer net dividend yield of at least 2.8%-3.4%.

One-stop vertically integrated solutions provider for electronics and plastic manufacturing. SALUTICA is primarily involved in the design, development and manufacture of consumer electronic products such as Bluetooth-related devices (i.e. Bluetooth stereo headsets, smart watches, car kits) as well as other electronic products and precision parts and components (i.e. optical light guide, 3D glasses, electronic door locks, plastic parts for lighting) for external brands. On top of that, the group is also involved in the product conceptualisation, design, development, manufacture and marketing and sales of its in-house Bluetooth related products under the brand name “FOBO”. (Please refer to the overleaf for more details of SALUTICA’s business segments)

Well positioned to ride on the Bluetooth growth wave. In recent years, adoption of Bluetooth technology has also been extended into low power environment such as sensors, hearing aids, fitness, health trackers as well as being embedded in apparel, following the introduction of new low energy Bluetooth Smart-Ready chipsets. This phenomenon has spurred the global Bluetooth-enabled device shipments to register an impressive CAGR of 18.6% from 2011 to 2014. Such adoption evolvement is also supporting the concept of connectivity in Internet-of-Things, which could drive shipments further by a strong CAGR of 13% in 2018, as suggested by SMITH ZANDER’s research. We believe SALUTICA is well poised to ride on the growing trend given its expertise of specialising in the Bluetooth technology coupled with its strong portfolio exposure to MNC’s customers (comprising some of the world’s major Bluetooth and mobile communications companies).

Boiling point of expansion. Note that the group’s production is already running close to its maximum ramp mode (at an utilisation rate (UR) of 71%). Screening through its utilisation of proceeds stated in the prospectus, RM25m (or 40%) of the total gross proceeds of RM62.4m from the public share issuance will be used to acquire new machinery and equipment as well as to upgrade its IT infrastructure. In particular, we understand that the group is looking to purchase an additional SMT line (on top of the three existing lines) alongside with other supporting machines and equipment, which will increase its maximum annual production capacity by 33.3%. Note that all these are to cater for higher orders of its external brands Bluetooth devices and to expand its FOBO product range. Meanwhile, RM10m proceeds (out of the RM25m) will be used to purchase a new production line with an estimated production capacity of c.3m devices per annum. This new line is to cater for a soon-to-be sealed contract; which is for the manufacturing of a USB powered device that adds touch screen functionality to non-touch laptop screens. The production lines are expected to be fully installed by 4QCY16 with mass production estimated to commence by end 2016/early 2017.

Trading Buy with a FV of RM1.00, based on a targeted 11x FY17E PER which is broadly in line with its peers. We are forecasting the group to register a 2-year NP CAGR of 13.5% with key earnings assumption being; (i) UR of 70% in FY16E-FY17E with SMT maximum annual production capacity assumptions of 13.9m in FY16E and 16.2m in FY17E, (ii) USD/MYR assumption of RM4.11/RM4.10 in FY16E/FY17E, and (iii) core NP margins assumption of 11-12%. Coupled with our net dividend yield of 3.4% in FY17E (DPR assumption of 30%), our TP of RM1.00 suggests a total upside of 28.5% from here. 

Source: Kenanga Research - 18 May 2016