We came away from the latest briefing with our POSITIVE stance reaffirmed, premised on the group’s strategic product exposures as well as technical edges to stay ahead of the industry. Post meeting, we expect higher sales mainly from Automotive segment and better operational efficiency, leading to an upgrade of +13%/+16% in our FY17E/18E CNPs. Any share price weakness present buying opportunities. Maintain OP with a higher TP of RM14.85 (based on 15.0x FY18E PER).

Further details on 3QFY17 results. Looking at the group’s financials in USD terms, which are more reflective of its operational performance, 3Q17 revenue declined by 4% sequentially (on seasonal weakness) but improved 5% YoY. The decent YoY growth was on the back of better sales from Automotive electronics and Communication segments. Management noted that the quarter would have been better if not for the temporary wafer supply shortage experienced by its top three customers in Automotive, Consumer and Circuit segments as well as the power outage experienced in the Suzhou Industrial Park. In terms of end-market breakdown, Automotive led the revenue growth (+3% QoQ).

Brighter prospect ahead. Management shared its strategies that will steer the group to outgrow the industry over a 2-year span. On the foreseeable future, management noted that the group’s sales will be underpinned by the increasing number of new product introductions in Automotive. We took comfort from the guidance as we gather that the leading Automotive technologies that are used for safety features (such as advanced package for pressures, magnetic, acceleration sensors), have already passed the stringent qualification stage and will see more meaningful earnings fruition in the coming quarters. Meanwhile for its midto-long-term plan, the group will focus on enhancing the quality of products to draw higher customer confidence. This will be done concurrent with increasing automation. In terms of the group’s balance sheet, while its net cash is piling up (at RM419.7m vs RM284.0m in 9M16), management noted that they will conserve cash for additional capex for expansion and noted that they are also finding ways to increase exposure in the Automotive segment (to 50% in 3-4 years’ time), of which they do not discount the possibility of merger/acquisition.

On 4Q17 outlook, management noted that the orders shortfall in 3Q17 will positively spilled over into 4Q17 alongside the easing of wafer shortage; hence, will augment the already seasonally stronger quarter. Besides the higher sales from Communication segment amid the launching of flagship smartphone, management noted that they are seeing positive traction from the Automotive sales with new products launching.

Our take post meeting. Post our model update with higher sales mainly from Automotive segment (total 4Q17 USD sales from +2% to +6% on higher UR assumption) and better operational efficiency, we raise our FY17E/FY18E CNPs by +13%/+16% which leads to an upgrade in TP to RM14.85 from RM12.75. This is still based on 15.0x FY18E PER (representing +1SD above its 3-year average PER). Maintain OP.

Risks to our call include: (i) Lower-than-expected sales and margins, and (ii) Unfavourable currency exchange to the group.

Source: Kenanga Research - 20 Apr 2017