We foresee earnings headwinds ahead for Globetronics on a potential delay in ramping up its new sensor modules as well as a further slowdown in its proximity sensors, given the gloomy outlook projected by some premium smartphone makers. We downgrade our call to NEUTRAL with our TP revised to MYR4.00 (from MYR6.66, 10% downside).

Likely delay in ramp-up. Based on our channel checks, Globetronics’ production ramp-up of its new sensor modules could be further delayed to 2017 from management’s last guidance of June this year. We believe this could be due to the increasingly cautious outlook on global smartphone shipment volumes, which prompted manufacturers to adopt a more conservative stance going forward. We now expect Globetronics’ run-rate for its new sensors to register at 4-6m units per month (from 20m-25m previously) and to only ramp up in 2Q17 in preparation for next year’s flagship smartphone launches. Proximity sensors might see further revision. By the same token, we believe its current proximity sensors production run-rate of 13m-14m pieces per month may see further downward revisions come next quarter. Recall that in Dec last year, management reduced its run-rate to the current level from 20m-22m units per month, due to a decline in demand from its customer. We now expect a run-rate of 10m units per month for the rest of the year, with momentum to pick up only by 2Q17 to 15m-20m ahead of next year’s premium smartphone launches. Forecasts and risks. Taking these two factors into consideration, we slash our FY16-17F EPS by 35-59%. Key risks include a further slowdown in the global semiconductor market and customers concentration risk – given that its single largest customer contributed close to 50% of FY15 revenue.

Downgrade to NEUTRAL. With the forex theme likely to go out of favour in anticipation of further strength in the MYR as we move into the next year (our in-house estimate is for it to average MYR3.80 per USD) and negative sentiment over the delay in its new sensors, we now peg the stock to a revised 1-year forward P/E of 15x (from 18x and at 20% premium to its regional peers). We also used DCF (Figure 3) as a corroborative methodology and derived a fair value of MYR4.31, which we deem reasonably close to our revised TP

DCF valuation. In our corroborative DCF valuation, we assumed capex allocation of MYR50m pa for the foreseeable future. We also peg a TG rate of 0.5%. The derived equity value of MYR4.31 translates into 16.2x 2017 P/E, which we deem to be reasonably close to our target multiple of 15x.

Source: RHB Research - 27 Apr 2016