INVESTMENT HIGHLIGHTS

• 2QFY18 normalised earnings grew by +6.9%yoy, underpinned by high volume loadings and improvement in profit margin

• 1HFY18 normalised earnings kept pace with our expectation

• Positives priced-in at current market valuation

• Revert to NEUTRAL with an unchanged target price of RM2.34 per share

Better financial performance. Globetronics Technology Bhd (GTB) 2QFY18 normalised earnings improved by +6.9%yoy to RM8.6m. 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 3QFY17. The increase in production volume has led to improvement in profit margin to 13.1% as at 2QFY18 (2QFY17: 11.2%).

Within our expectation. Cumulatively, GTB’s 1HFY18 normalised earnings amounted to RM24.7m (+85.1%yoy). This came in within ours but above consensus expectations, accounting for 26.2% and 32.9% of full year FY18 earnings estimates respectively.

Target price. We are maintaining our target price of RM2.34 (post corporate exercises) based on DDM valuation methodology.

Revert to NEUTRAL. 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 has been reflected in its 1HFY18 financial performance, supported by higher volume loading and expansion in profit margin.

However, we view that this positive outcome has been priced-in into current valuation. In 2QFY18, GTB’s share price has appreciated by 30.1%. Due to the steep rise in share price, we opine that dividend yield is also less attractive at below four percent. Moreover, we do not discount the possibility that chipmakers could face great risk in escalating trade tensions between US and China. All factors considered, we are reverting our recommendation to NEUTRAL from TRADING BUY previously.

Source: MIDF Research - 1 Aug 2018