INVESTMENT HIGHLIGHTS

• Stellar 4Q17 earnings lifted the group’s full year FY17 earnings higher by +102.3%yoy to RM51.5m

• Contribution from the sensor and timing and quartz devices segment made up 70% of the group’s revenue

• Expecting FY18 to another record year in view of new project wins

• Upgrade to TRADING BUY with a higher target price of RM6.68

Surge in 4Q17 earnings. Globetronics Technology Bhd (GTB) 4Q17 normalised earnings surged by more than seven fold to RM24.96m. The rise in earnings was mainly due to higher volume loadings and mass production of new products. As a result, the group’s profit margin also improved to 23.9%. To recall in 4Q16, the group’s earnings performance was severely impacted by the reduction in end customer’s demand.

FY17 earnings surpassed expectation. The stellar 4Q17 earnings performance contributed to the +102.3%yoy improvement in full year FY17 normalised earnings of RM51.5m. This came in above our expectations by a variance of more than five percent.

Impact. We are revising upwards FY18 earnings estimates to RM94.1m to account for expected higher contribution from the sensor division. Post our earnings adjustment, we now expect the sensor division to account for more than 50% of the group’s FY18 revenue as compared to 36% achieved for FY17.

Target price. We are updating our valuation base year to FY19 and derive a new target price of RM6.68 per share (previously RM5.31) based on DDM valuation methodology.

Upgrade to TRADING BUY. The group has stage a strong comeback in 2017 after a disappointing 2016 performance. This was mainly driven by its sensor division. For 2018, the division is expected to perform better in view of the three projects secured for the smart device sector. This would also provide a boost to the group’s 1Q18 earnings. Note that, traditionally, the first quarter has been a weak quarter for the semiconductor industry. With the new projects, we opine that the group would be able to, at the very least, maintains its average selling price. Coupled with higher volume loading, we expect the group’s profit margin to expand further. Based on historical track record, GTB is one the highest dividend yielding stock in the semiconductor sector. Thus, we view that the expected dividend yield of approximately four percent would serve as additional sweetener to investor. All factors considered, we are upgrading our recommendation to TRADING BUY from neutral previously.

Source: MIDF Research - 28 Feb 2018