KEY INVESTMENT HIGHLIGHTS

• 3Q19 normalised earnings reduced by -21.3%yoy to RM18.2m in view of volume loadings of products

• Cumulative 9M19 normalised earnings of RM29.3m (-38.8%yoy) came in within expectation

• Dividend yield expected to be unattractive at below four percent

• Recovery in earnings anticipated to be slow and gradual

• Maintain SELL with a revised TP of RM1.82

Lower quarterly earnings. Globetronics Technology Bhd (GTB) 3Q19 normalised earnings declined by -21.3%yoy to RM18.2m. The decline in earnings was mainly attributable to lower volume loadings of products from certain customers in the group. Note that 3Q19 revenue dipped by -24.4%yoy to RM66.3m as sales from the South East Asia and North America market segments reduced further.

Within expectations. Cumulatively, 9M19 normalised earnings amounted to RM29.3m, a contraction of -38.8%yoy. The decrease in earnings was mainly due to: i) phased out of certain matured products of a Japanese customer and; ii) lower capacity utilization and volatile volume loadings of certain products especially in the first half of 2019. All in, the group’s 9M19 financial performance came in within ours but below consensus expectations, accounting for 60.0% and 52.9% of full year FY19 earnings estimates respectively

Target price. We are revising out target price to RM1.82 (previously RM1.47). While we keep our FY19 and FY20 earnings estimates unchanged, we are increasing the group’s terminal growth to 4.5% from 4% previously. We view that the revision in the terminal growth corresponds with the positive development surrounding the US-China trade war as well as the group’s effort to diversify away from the smartphone market.

Maintain 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 acknowledge 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 below 4.0% is unable to make up for the anticipated retracement in share price. All factors considered, we are maintaining our SELL recommendation.

Source: MIDF Research - 30 Oct 2019