Maintain BUY with Target Price of RM0.85

We maintained BUY recommendation with target price of RM0.85 based on industry P/E average of 10.7x on our estimated EPS for FY19F.

3QFY18 revenue up 52.4% yoy but down -45.1% qoq

Salutica 3QFY18 revenue increased by RM16.5m or 52.4.3% yoy but decrease by RM39.5m or -45.1% qoq to RM48.0m. The lower revenue recorded compare to preceding quarter was due to seasonality factor while its increase compare to same quarter last year was due to increase in the sales order volume for the headsets.

However, 3QFY18 posts quarterly loss on R&D expenditure

While revenue rose y-o-y, 3QFY18 record 1st quarterly loss before tax of RM0.2m as compared to PBT of approximately RM1.0mil compare to same quarter preceding year mainly attributed to increased spending on

1. research activities to enhance service offering;

2. research, design & marketing expenses for in-house brand FOBO (including personal healthcare products); and

3. collaborate design expenses with a European design house to develop world-leading technology for high performance Bluetooth cable-less headset products.

R&D spending is required to materialize future product launches staring in 2nd half of 2018.

Maintain Buy with Target Price of RM0.85

Although 3QFY18 recorded loss and below our expectation, we maintained our target price for Salutica at RM0.85 as continue investment in R&D is necessary for future products launches. We continue to like Salutica for its track record, specialization in Bluetooth consumer electronics manufacturing capability as well as its healthy balance sheet. Salutica’s share price has been on a downtrend since end of last year on worries that it could be a direct casualty from ongoing trade war between United States and China. At current level, we believe the sell down is overdone, value emerge and maintain our BUY recommendation for the stock.

Source: Mercury Research - 28 May 2018