INVESTMENT HIGHLIGHTS

• Decline in volume loadings lead to -13.8%yoy drop in 2QFY19 normalised earnings

• 1HFY19 normalised earnings of RM11.0m (-55.3%yoy) came in severely below ours and consensus expectations

• Low volume loadings expected persist leading to dismal FY19 earnings performance

• Downgrade to SELL with a revised target price of RM1.47

Quarterly earnings weaker than anticipated. Globetronics Technology Bhd (GTB) 2Q19 normalised earnings declined by - 13.8%yoy to RM7.4mm. The decline in earnings was mainly attributable to drastic decline in volume loadings from certain customers in the group.

1H19 earnings came in below expectations. The dismal 2QFY19 financial performance led to 1HFY19 normalised earnings of RM11.0m. This represents a reduction of -55.3%yoy. This was primarily premised on phased out of certain matured products of a Japanese customer and lower volume loadings for products related to the smartphone market. All in, 1H19 normalised earnings failed to keep pace with ours and consensus expectations, accounting for 19% and 18.3% of FY19 full year earnings estimates respectively.

Impact on earnings. We are lowering our FY19 and FY20 earnings estimates to RM48.8m and RM56.1m respectively as we are lowering the production volume assumptions from across all its major products offering.

Target price. We are deriving a revised target price of RM1.47 (previously RM1.76) based on DDM valuation methodology.

Downgrade to SELL. The soft volume loadings continue to negatively impact the group’s well-being as seen in 1HFY19 financial performance. While we expect some earnings recovery in 2HFY19, we opine that it would be insufficient to make up for the underperformance seen in 1HFY19. While we acknowledged the group’s effort to diversify away from the smartphone market, we are of the view that meaningful contribution to the bottomline can only be seen in the later part of FY20.

Given the poor near-term outlook, we expect the share price to come under great pressure. Moreover, we believe the estimated dividend yield of 3.5% to 4.0% is unable to make up for the anticipated retracement in share price. All factors considered, we are downgrading our recommendation to SELL from NEUTRAL previously.

Source: MIDF Research - 1 Aug 2019