We recently met with Globetronics’ management for an update and came away  positive on its growth prospects. Management guided that its three core businesses (timing and  quartz crystal devices (TQCD), LED components and sensor  manufacturing) will continue to do well. It is  working on a new sensor product –  a LED sensor module scheduled  to begin mass production by 2Q14. It is also  targeting for more new design wins for new  models of smartphones and tablets.  We project 3-year earnings  CAGR of 23.6%.  Earnings  growth is underpinned by sustainable sales volume from its three core units, better economies  of scale and  implementation of cost controls.  We maintain our  BUY call with a FV of MYR3.48, based on FY14 target P/E 15x. Our valuation is backed by its strong earnings growth, with a low 0.43x 3-year PEG coupled with consistent dividends and a strong balance sheet.

Earnings  visibility  remains  intact.  Globetronics  Technology  (Globestronics)’s  earnings  visibility  remains  intact.  Management  guided  that earnings growth would be driven by its core businesses, ie  TQCD, LED components and  in particular, sensor  manufacturing.  Overall, we  are expecting a 3-year earnings CAGR of 23.6%. Growth is underpinned by sustainable sales volume from its three core business segments, better economies  of scale and implementation  of cost control measures. The company is looking into automated  inspection equipment to reduce  its headcount upon the implementation of minimum wages since January 2013.

Expanding its sensor business. While its proximity sensor product is seeing relatively flat loading at 16m-19m pieces per month, the company is working on new product  – LED sensor modules. It plans to begin mass production of LED sensor modules by 2Q14. In addition, Globetronics is  targeting  for  more  new  design  wins  for  newer  models  of  sm artphones  and  tablets.  Meanwhile,  its  temperature-compensated  crystal oscillator  (TCXO)’s  production  volume  increased  from  2m  units  in  December  last  year  to  8m  units  per  month  in  November  2013.  It  would further ramp up total volume to 10m units per month in 2014.

Eyes  supplying  TQCD  components to  Chinese-brand smartphones and tablets.  Monthly production volume for TQCD has been quite firm at 110m-120m units per month. The company is working with its Japanese customer to look for opportunities to supply TQCD for some Chinesebrand smartphones and tablets in 2014. The Japanese customer is the market leader in supplying timing and quartz crystal devices worldwide.

Grant  income  to  be  recognised  in  FY14.  Globetronics  has  obtained  a  10-year  tax-free  pioneer  status  and  the  approval  of  “direct  domestic investment”  grant  income  for  the  development  of  its  proximity  sensors  from  Malaysian  Investment  Development  Authority  (MIDA).  The company would be realising about MYR6m in grant income by FY14. Nevertheless, we make no changes to our forecasts as we had factored in the grant income into our estimates earlier.

Maintain BUY, MYR3.48  FV.  While we expect  flat q-o-q  results in  4Q,  as orders are generally flat at the year-end, there could be  a  potential higher dividend as the company is set to record another new high in earnings. Its 9M13 net profit of MYR39.5m made up of 96% of its full-year earnings  of MYR41.3m in FY12.  Hence, we are revising our  FY13 DPS forecast to 17 sen from 16 sen,  while  maintaining our FY14  dividend forecast as Globetronics  might need more capital expenditure for developing new products  in FY14.  We keep  our FV at  MYR3.48, based on a target  FY14  P/E of 15x, which is still below its peak P/E of 19.2x   in  the past 6 years. Our valuation is  premised on  its strong earnings growth, with  its  low  3-year  PEG  of  0.43x,  coupled  with  consistent  dividends  paid  out  and  a  strong  balance  sheet.  We  maintain  our  BUY recommendation.

Source: RHB