KEY INVESTMENT HIGHLIGHTS

• 3QFY02 normalised earnings improved by +337.9%qoq due to higher volume loading and return of full workforce
• 9MFY20 normalised earnings amounted to RM32.3m (+10.4%yoy), supported by the South East Asia segment
• Dividend payout could remain low in order to preserve cash to meet future capex commitment
• Valuation is more expensive as compare to its peers who possess stronger earnings growth prospect
• Upgrade to NEUTRAL with a revised TP of RM2.57

Slight improvement in quarterly earnings. Globetronics Technology Bhd (GTB) 3QFY20 normalised earnings remained resilient at RM18.7m (+2.6%yoy) as compared to RM18.2 achieved in 3QFY19. This was mainly driven by lower effective tax rate. Meanwhile, on a quarter-overquarter basis, the normalised earnings improved by more than three folds due to higher volume loadings as well as operation running at 100% workforce capacity. To recall, during the MCO, GTB’s operation was running at 50% workforce capacity.

Above expectation. Cumulatively, 9M20 normalised earnings amounted to RM32.3m, an improvement of +10.4%yoy. This was mainly supported by the +4.5%yoy increase in 9M20 revenue to RM164.4m. Note that revenue from the South East Asia segment has improved by +6.0%yoy to RM154.0m. However, the North America segment posted a -26.0%yoy contraction in revenue to RM8.4m. Nevertheless, we view that GTB’s 9M20 financial performance came in better than our expectation, although it accounts for 76.1% of FY20 full year earnings estimates. We expect the group to perform reasonably well in 4QFY20.

Impact. We are adjusting our FY20-22 earnings higher to RM51.2- 83.0m. This is due to our upward revision in our volume loadings assumption which also led to improvement in profit margin assumption.

Target price. While we expect the group’s outlook to improve, we view that the dividend payout would be capped as we view that there is more urgency to build a bigger cash reserve to meet their capex commitment. Given that future dividend payout would not reflect the group’s earnings outlook, we view that it would be more appropriate value the stock using PER valuation methodology as compared to dividend discount model (DDM) valuation methodology. Following our change in our earnings estimate as well as valuation methodology, we arrive at a new target price of RM2.57 (previously RM1.77). This is premised on pegging FY21 EPS of 9.9sen against the group’s two year historical average PER of 26x.

Upgrade to NEUTRAL. The group has made a strong earnings recovery post the pandemic as evident in its 3Q20 quarterly results. This has been better than we had anticipated. Moving forward, we expect a more consistent earnings growth. This would be mainly supported by the group’s new generation of smart sensors which include light, gesture and motion sensors. In addition, the recovery in automotive market would also lend a supported to the group’s LED business. Nevertheless, the earnings growth prospect of GTB would seem to be less enthusiastic as compared to its peers which we believe is more aggressive in expanding the business. This would also suggest at the group’s current valuation of approximately 40x is much more expensive as compared to its peers. In addition, we opine that dividend yield would only hover around 3% as we expect the group to increase its cash reserve to meet future capex commitment. All factors considered, we are upgrading our recommendation for GTB to NEUTRAL from sell previously.

Source: MIDF Research - 28 Oct 2020