We  recently  met  Globetronics’  management  for  a  review  on  the  company’s  latest  quarterly  results  and  an  update  on  its  outlook.  The company  has  been  ramping  up  production  capacity  to  meet  clients’  needs.  It  has  also  pulled  off  a  design  win  which  saw  it  supplying  a component for a smartphone model from a prominent Korean brand, thus diversifying its client base. It has also obtained a 10-year pioneer status for its proximity sensors  as well as  applied for  a grant  that would  see the  return  of about MYR15m of capex invested  over  three years.  We  are  tweaking  our  FY13F  forecast  and  rolling  over  our  valuation  to  FY14F.  Maintain  BUY  on  Globetronics,  with  a  higher  FV  of RM2.76, pegged to the stock’s 5-year average P/E of 12x.

Businesses  are  still  faring  well.  All  of Globetronics’  core businesses, except  for its  integrated  circuits (IC) business  that is  relatively flat,  are doing  well.  We  see  significant  contributions  from  sales  in  its  timing  and  quartz  crystal  devices  segment,  LED  components  and  sensors manufacturing for  FY13. In 2010 and 2011, the company ramped up production of timing and quartz devices at  its Sungai Way plant  to about 110-120m  units  per  month  from  about  60m  units  monthly.  Management  has  guided  that  production  volume  would  be  further  boosted  to 140m units per month starting from August 2013 to cater to higher orders.

Scoring a win with prominent Korean smartphone  brand.  The monthly production  of temperature compensated frequency devices (TCFC), a global positioning system (GPS) component installed in smartphones and tablets, rose from 4m units monthly last year to 8m units in May. This volume  jumped  further to  about 9.3m units in June.  The higher volume was  boosted by the  company’s success in  securing the  design win to supply TCFC component to a prominent Korean smartphone brand. We are comfortable with the company’s efforts to diversify its client base.

10-year pioneer status & grant income. Meanwhile, Malaysian Investment Development Authority (MIDA) has granted Globetronics a 10-year pioneer status for the development of its proximity sensors, from which the company will enjoy a tax-free period for 10 years for this product. In addition, the company has submitted application for “Direct Domestic Investment” grant to MIDA. Based on the MYR30m capex invested so far in its proximity sensor technology, Globetronics should receive a MYR15m grant that would be amortised over a three-year period.

1Q13  smartphone shipments up sharply.  According to  information research and advisory company  Gartner, global smartphone sales  surged 42.9%  y-o-y  in  1Q13  despite  flat  worldwide  mobile  phone  sales  growth  of  0.7%  y-o-y.  In  Asia  Pacific,  smartphone  sales  grew  strongly, particularly  in  China.  Nevertheless,  we  believe  that  the  stronger  sales  in  China  would  benefit  the  local  and  Chinese  manufacturers  that dominate  the  China  market.  According  to  Gartner,  Samsung  and  Apple  remained  the  key  players  in  the  market,  accounting  for  30.8%  and 18.2% of global smartphone sales respectively as at end of March 2013.

Maintain  BUY, RM2.76  FV.  Due to the implementation of  minimum wages, the company  has incurred MYR3.5m–MYR3.6m  in  additional cost per year. However, we expect the higher cost to be  absorbed  by higher margins and higher orders from its timing and quartz crystal  products as well as sensor manufacturing segments.  We are tweaking  our FY13F forecast  and rolling  over our valuation to  FY14F. All said, we maintain our BUY call, with a higher FV of RM2.76, pegged to the stock’s 5-year average P/E of 12x.

Source: RHB