KEY INVESTMENT HIGHLIGHTS

• 1QFY20 normalised earnings recovered by +161.2%yoy in comparison with a poor 1QFY19 financial performance

• We are expecting earnings on quarter-over-quarter basis to be less volatile moving forward

• Covid-19 outbreak and disruption in China’s supply chain could further depressed the group’s business outlook

• Dividend yield to remain on the lower end as compared to historical track record

• Maintain SELL with an unchanged TP of RM1.67

Partial recovery in quarterly earnings. Globetronics Technology Bhd (GTB) 1QFY20 normalised earnings improved by +161.2%yoy to RM9.4m. The improvement in earnings was mainly attributable to higher volume loadings of products and significant increase in economy of scale from certain customers in the group. Note that in 1QFY19, the group’s financial performance was severely impacted by the drastic reduction in production volume.

Within expectation. All in, GTB’s 1QFY20 financial performance came in within ours but below consensus expectations, accounting for 22.6% and 14.9% of full year FY20 earnings estimates respectively. This was an improvement in comparison to 1QFY19 whereby the earnings consist of less than 10% of FY19 full year earnings. Moving forward, we are expecting a more stable earnings performance on a quarter-over-quarter comparison.

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

Target price. We are maintaining our target price of RM1.67 based on dividend discount model (WACC: 9.88%)

Maintain SELL. The soft volume loadings continue to negatively impact the group’s well-being as seen in FY19 financial performance. Moving forward, we expect the future earnings of the group to be impacted by the COvid-19 outbreak as well as the disruption in the supply chain in China. This could potentially derail the group’s effort to diversify away from the smartphone market. Moreover, we do not expect the dividend payment to be attractive, which is a stark difference from the group’s historical track record. All factors considered, we are reiterating our SELL recommendation.

Source: MIDF Research - 21 May 2020