• Still NEUTRAL, new MYR1.01 TP from MYR1.05, 8% downside. 1Q23’s core profit of MYR3m (-66.3% YoY) was below expectations – mainly dragged by softer volumes – while margins were further compressed on lower topline and higher input costs. We slash our forecasts accordingly to reflect the prolonged demand softness despite the expectation of earnings improvements in the quarters ahead in tandem with the seasonally stronger 2H, given the smartphone cycle ramp-up. We still see FY23 as a consolidation year.

• Below expectations. 1Q23 revenue and core profit of MYR33.1m (-22% YoY) and MYR3m were below expectations at 7.6% and 7.1% our and Street’s full-year estimates. Despite 1Q being seasonally soft, the numbers remain well short of full-year forecasts on expectations of prolonged weak demand for end-products. In short, lower demand for sensor products, loss of economies of scale, and increases in utilities and staff costs contributed to the dip in Globetronics Technology’s YoY profitability, where EBITDA margin dropped to 23% from 1Q22’s 35.4%.

• A seasonally soft quarter compounded by lower run rates. Core profit fell 79.2% QoQ due to the lower volume loadings for all products and 4Q22’s high base factor from adjustments made on the over-accrual of expenses. These were compounded by the higher staff costs stemming from the minimum wage hike and higher imbalance cost pass-through or ICPT rate implemented since January.

• Outlook. The volume loadings for both the gesture and lights sensors are set to be flattish – only marginally higher into 2Q from 17-20m currently. Meanwhile, volumes for quartz crystal timing devices show further weakness along with LED and other integrated circuits or ICs. Note: The ramp-up of the new generation of gesture and light sensors are likely in June-July. Total estimated capex for FY23 is budgeted at MYR35-40m.

• Forecasts and ratings. Our FY23F-25F earnings are lowered by 39.5%, 16.6%, and 12.1% as we factor in the lower run-rate and margins assumptions. We roll forward our valuation base year to FY24F, resulting in a lower MYR1.01 TP, which is based on an unchanged 17x target P/E at -0.5SD from its 5-year mean. A 0% ESG premium/discount is baked into our TP, given that Globetronics’ 3.0 ESG score, based on our in-house proprietary methodology, is in line with our country median. While the counter is trading below the sector-average valuation, FY23’s lacklustre outlook and higher-input cost factors continue to weigh on the group.

• Key downside/upside risks: i) Further softening/strengthening of smartphone and peripheral sales, ii) a stronger/weaker MYR, and iii) major product and/or customer losses/wins.

• ESG framework update. As there is now greater focus on the E pillar on critical climate change issues, we tweaked our ESG weightage. Henceforth, we assign a 50% weightage to the E pillar, followed by 25% each to the S and G pillars. See our 2 May thematic research for more details.

Source: RHB Research - 3 May 2023