INVESTMENT HIGHLIGHTS

• Strong volume loadings lifted 1Q18 normalised earnings by more than three folds
• Commendable 1Q18 profit margin of 17.6%
• Expecting stronger financial performance in 2H18
• Maintain TRADING BUY with a revised price of RM5.53

Bumper earnings for 1Q18. Globetronics Technology Bhd (GTB) 1Q17 normalised earnings surged by more than three folds to RM16.1m. The rise in earnings was mainly due to higher volume loadings of products from certain customers in the group. Note that the pick-up in volume loadings from the mass production of new products has been observed since 3Q17. The increase in production volume has led to improvement in profit margin to 17.6% as at 1Q18 (previously 9.4%.

Within expectation. The group’s 1Q18 normalised earnings made up 17.1% and 20.0% of ours and consensus full year FY18 earnings estimates respectively. This is within ours and consensus expectations as historically the first quarter is usually the weakest quarter. Moreover, we are expecting significant increase in production activities in 2H18 in view of strong volume loadings.

Impact. No change to our earnings estimates at this juncture.

Target price. We are imputing a more conservative terminal growth of 4.0% (previously 5.0%) to factor in: i) uncertainty surrounding the USChina trade war and ii) global slowdown in demand of smart devices. As a result, we are revising our target price to RM5.53 per share (previously RM6.68) based on DDM valuation methodology.

Maintain 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. Given the weakness in share price, we view that the expected dividend yield of more than five percent would serve as additional sweetener to investor. All factors considered, we are maintaining our TRADING BUY recommendation.

Source: MIDF Research - 25 Apr 2018