KEY INVESTMENT HIGHLIGHTS

• 2QFY20 normalised earnings plunged by -46.4%yoy to RM4.3m which derailed the group’s earnings recovery

• 1HFY20 normalised earnings amounted to RM13.6m (+23.4%yoy), in-line with our expectation

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

• Valuation remains stretched at more than 20x given the subdued earnings performance Maintain SELL with a revised TP of RM1.77

Weaker quarterly earnings. Globetronics Technology Bhd (GTB) 2QFY20 normalised earnings contracted by -46.4%yoy to RM4.3m after excluding the impact on forex. This was mainly attributable to: i) lower volume loadings and supply chain inventory adjustment from most of the Group’s customers, and ii) implementation of the MCO and work from home order which h resulted in lower economy of scale.

Within expectation. Cumulatively, 1H20 normalised earnings amounted to RM13.6m, an improvement of +23.4%yoy. To recall, 1H19 financial performance was negatively affected by the drastic decline in volume loadings from the group’s customers. All in, we view that GTB’s 1H20 financial performance came in within our expectation, accounting for 32.7% of full year FY20 earnings estimate. Note that based on historical trend, the group performed much better in the second half of the financial year.

Impact. We are adjusting our FY20/21/22 earnings upwards marginally by 2.0%/1.7%/1.5% as we fine-tune our interest income assumption to better reflect the group’s cash position.

Target price. Subsequent to our earnings adjustment, we are revising our target price to RM1.77 (previously RM1.67) based on dividend discount model (WACC: 9.88%)

Maintain SELL. The advent of the Covid-19 pandemic has put in a dent in the group’s recovery in volume loadings as seen in the 2Q20 quarterly result. Coupled with the disruption in the global supply chain, we foresee that the group’s volume loading would remain under pressure which would have adverse impact on the profit margin. In addition, the ongoing pandemic could potentially derail the group’s effort to diversify away from the smartphone market. On a separate note, at current price, we view that the valuation is rather stretched at more than 20x as compared to 5yr historical of 18x. We also 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 - 29 Jul 2020