INVESTMENT HIGHLIGHTS

• Drastic decline in volume loadings led to -77.6%yoy drop in 1Q19 normalised earnings

• This came in severely below our and consensus FY19 earnings estimates

• Near-term earnings weakness to persist, with notable recovery expected to be seen in 2H19

• Maintain NEUTRAL with a revised target price of RM1.76

Quarterly earnings weaker than anticipated. Globetronics Technology Bhd (GTB) 1Q19 normalised earnings plummeted by - 77.6%yoy to merely RM3.6m. The decline in earnings was mainly attributable to drastic decline in volume loadings. Note that some of its customers cease shipments towards the end of March 2019 in order to deplete the existing inventory. All in, 1Q19 financial performance failed to keep pace with our and consensus expectations, accounting for 4.6% and 5.0% of FY19 full year earnings estimates respectively.

Stable cash holdings. In view of the weak earnings generated during the review quarter, the net operating cash flow declined to RM27.8m (- 26.7%yoy). This led to the decline in cash balance to RM119.4m (- 7.8%yoy). Nonetheless, we view that the existing cash balance is still sufficient to maintain its dividend commitment.

Impact on earnings. We are lowering our FY19 and FY20 earnings estimates to RM58.2m and RM69.9m respectively as we are lowering the production volume assumptions from across all its major products offering.

Maintain NEUTRAL. The cessation of shipment for its product in March 2019 indicates that GTB’s volume loadings will remain soft, at least for 2Q19. As such, we view that this would translate into feeble near-term share price performance. However, we view that the group’s 2H19 outlook to improve considerably, driven by its initiative to diversify its product offering. This will also lead to lower customer concentration risk. Meanwhile, we opine that GTB’s dividend yield remains attractive as compared to its peers, supported by its resilient cash holdings. All factors considered, we are maintaining our NEUTRAL recommendation at this juncture.

Target price. We are rolling forward our valuation base to FY20 and derive a new target price of RM1.76 based on DDM valuation methodology.

Source: MIDF Research - 2 May 2019