4QFY19 NL of RM23.2m (vs. 4QFY18 NP of RM23.5m) brought FY19 NL to RM9.5m (vs. FY18 NP of RM95.8). However after stripping out the expense of RM76m relating to the closure of its Batam plant, the group registered a CNP RM64.4m (vs. our forecast and consensus CNP of RM58.7m and RM59.7m respectively). We adjust FY20E CNP upwards by 20% to RM100.4m while we introduce FY21E CNP of RM123m. Maintain UNDERPERFORM with a lower TP of RM2.00.

Above expectations. 4QFY19 net loss (NL) of RM23.2m (vs. 4QFY18 NP of RM23.5m) brought FY19 NL to RM9.5m (vs. FY18 NP of RM95.8m). However after stripping out the expense of RM76m relating to the closure of its Batam plant, the group registered a CNP RM64.4m, which is above our forecast and consensus CNP of RM58.7m and RM59.7m respectively.

YoY, FY19 revenue fell 7.4% YoY to RM1.25b (USD terms: -9.8%), due to lower sales volume across all segments. This was further exacerbated by higher effective tax rate arising from: (i) deferred tax recognized, and (ii) non-deductible losses of a subsidiary company. During Q4, the group was hit by another round of expenses relating to the closure of its Batam plant, such as (i) impairment on PPE, (ii) write down of inventories, and (iii) loss allowance on trade receivables. As a result, the group recorded NL of RM9.5m for FY19.

Cloudy quarter ahead. While the management is satisfied with its January sales (70% utilisation rate), the Covid-19 outbreak in China has dampened optimism as its Chengdu plant was closed for two weeks during the extended Chinese New Year break. We also noted that there are still 800 workers in the Batam plant who are expected to be laid off when the plant officially closes down by 31 Mar 2020. Meaning there could be a final tranche of severance cost, albeit a smaller amount, we reckon. Currently, the Batam plant is still running at a minimum level to complete some final orders for existing customers. Equipment from the Batam plant will be relocated to the Chengdu and Ipoh plants to cater for additional capacity. The group expects to vacate the Batam plant by end-June 2020. Moving forward, the group expects to see more demand for its micro electromechanical systems (MEMS) microphones from existing and new customers. Currently, the group is capable of producing 5m units/mth and is running at 60%. The group expects to ramp up production further, upon getting approvals from its customer. We believe that the MEMS microphones are used in end-products such as true wireless stereo (TWS) and home assistant pods.

We adjust FY20E CNP upwards by 20% to RM100.4m to factor in the closure of the Batam plant that was weighing down the group by circa RM20m a year. Meanwhile, we introduce FY21E CNP of RM123m as we expect the company to see a recovery, premised on the eventual adoption of 5G in the market.

Maintain UNDERPERFORM with a lower TP of RM2.00 (from RM2.15) based on FY20E PER of 14.0x (previously 18x), in line with the group’s 3-year mean. Given this set of disappointing results and an uncertain outlook ahead, we believe risks outweigh rewards at this juncture.

Risks to our call include: (i) stronger-than-expected USD/MYR, (ii) faster-than-expected adoption of 5G, and (iii) a resolution of the trade war.

Source: Kenanga Research - 27 Feb 2020