1Q20 loss widen on lower revenue and higher R&D cost

Salutica 1Q20 loss widen as revenue decline (yoy:-43.0%, qoq:+16.0%) exacerbated by higher cost in relations to new project developments. The lower revenue was mainly due to order fulfillment constraint by material lead time thus we expect revenue in coming quarters to recover once issue resolved, coupled with festive season in coming quarter.

New businesses – sleep science, smart homes and next generation headsets

Although we are positive with the Group’s diversification to new project, away from sole reliance on Bluetooth headsets, we do not expect significant contribution from new businesses in near future and expect R&D cost to remain higher previous year.

Maintain 2nd dividend despite negative free cash flow

The group maintained its 2nd interim dividend at 0.6 sen per share for FY20, to be paid on 18 Dec 2019.

Maintain Hold recommendation with higher TP of RM0.66

We expect coming quarters to be positive on higher contribution from the new cordless Bluetooth headset once its order fulfillment back to normal, nevertheless we maintain our FY20F forecast pending clearer earnings visibility and maintain Hold recommendation with higher target price of RM0.66 based on higher P/E of 12.0x on our estimated EPS for FY20F.

Source: Mercury Research - 25 Nov 2019