Post briefing, we were reaffirmed by the management of brighter prospect in FY19, premised on a better portfolio profile which will anchor a +10% CNP growth. While 1Q19 sales in USD terms could be weaker QoQ in view of the high base in 4Q18, management’s guidance of +5% growth in FY19 is in line with our +6% projection. At 12.5x FY19E PER (which is its mid-cycle valuation), most positives are priced in. Still MP with an unchanged TP of RM12.20.

Further details on 4Q18 results. We came away from the briefing (which was attended by a crowd of c.30 analysts and fund managers) feeling reassured of a brighter FY19 as guided by management which will see a recovery of +10% at its CNP level. Management’s main focus is still on the portfolio rationalisation (by way of phasing out legacy/low margin products or negotiating for higher ASP), which should see a cleaner slate alongside better portfolio profile. In terms of 4Q18 sales in USD terms, the 7% QoQ growth was indeed a strong quantum as expected by management; predominantly driven by Automotive sales (+11%). The progression is on track; which is to skew capacity towards Automotive sensor and Industrial (servers) copper clip packaging, which carry higher margins. In terms of 4Q18 products breakdown YoY, improvement continued to be seen in Automotive electronics (+21%) and Industrial segments (+15%), offsetting the much weaker performance in Smartphone (-12%), Features phones (-50%) and PC (-17%). EBIT margin increment (+40% QoQ, +3% YoY) from the transformation programme was, in fact, sufficient to offset the adverse currency impact (USD/MYR: 1% QoQ, -9% YoY), thanks to the higher margin products carried by these segments.

A better portfolio profile in FY19. FY18 was a transition year for the group, dragged by adverse currency translations (in 9M18), higher material costs, wafer constraints. While the portfolio rationalisation exercises were also ongoing, which have initially caused some glitches in terms of operational deleveraging, the silver linings were seen in gradual pick-up in Automotive sensors-related packaging business, augmented by a strong recovery of USD/MYR in 4Q18. Management noted that Automotive portfolio is still showing positive traction, which should counterbalance the waning sales from the legacy portfolio (which we believe is contributing >10% of total revenue). Ultimately, management’s ideal contribution of Automotive segment is 50% (vs. current 30% and our assumption of 32%/36% in FY19/FY20) in three years. In terms of outlook, while weaker 1Q19 sales in USD terms QoQ could be the case in view of the high base achieved in 4Q18, management has guided for a +5% growth in FY19, which is in line with our +6% assumption. This should be supported by new high- margins products, i.e. MEMS, Copper clips and Flipchips, with stronger sales momentum in 2H19. We made no changes to our estimated 6% USD sales growth in FY19, while expecting a similar growth quantum for FY20.

Other key notes. The group’s net cash is still pilling up at RM573m vs. RM544m in 3QFY18. While this paves the way for higher dividend pay- out, we prefer to stick to the pay-out quantum for FY18 (which is 31.0 sen or 34% DPR) considering the group’s expansionary mode to grow its Automotive segment. Recall that the group is conserving cash for additional capex for expansion and is finding ways to expand its portfolio offerings, not discounting the possibility of merger/acquisition.

Maintain MP. Post model updates, we tweaked our FY19E CNP by 1% while introducing our FY20E CNP of RM171.0m (+6%). No changes made to our TP of RM12.20 (still based on a targeted 13.0x FY19E PER which is the group’s mid-cycle valuation).

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

Source: Kenanga Research - 27 Aug 2018