• Downgrade to SELL from Neutral, new MYR1.42 TP from MYR1.05, 11% downside. Globetronics Technology’s 1H23 core profit of MYR6.8m (-65.9% YoY) met our but missed Street estimates. Its lower topline and higher input costs continued to undermine margins amid a lacklustre loading factor. 2H earnings should improve on seasonal factors, but we remain cautious on the prolonged sector downcycle. Post share price run-up, its valuation is now lofty and optimism over a potential new customer is in the price. Our new call is also premised on its weak earnings profile and uncertain demand outlook.

• Within our but below Street expectations. 1H23 revenue and core profit of MYR64.6m (-28% YoY) and MYR6.8m are at 27.6% and 21.4% of our and Street full-year estimates. The results are within our expectations, as 2H is typically a stronger period that brings the majority (60-70%) of Globetronics’ full-year earnings. The lower demand for sensor products, loss of economies of scale, increases in utility and staff costs and higher tax expenses led to the sharp YoY drop in profitability. Effectively, its EBITDA margin dropped to 24.7%, from 36.1% in 1H22.

• Lacklustre demand continues to affect run rates. The group’s 2Q23 revenue contracted 4.9% QoQ or 33.8% YoY due to lower volume loadings with the overall utilisation rate at 66%. Core profit improved by 26% QoQ, thanks to favourable FX movements but plunged by 65.5% YoY from weaker revenue as well as higher input costs and tax expenses.

• Outlook. The volume loadings for both the gesture and lights sensors are set to improve by 10-15% into 3Q (from 15m-20m currently), due to the ramp- up of the new smartphone cycle. Consistent with the run rate of the supply chain, a YoY production volume contraction for the major smartphone brand can be expected. Meanwhile, shipping volumes of quartz crystal timing devices remain soft, while loadings for light-emitting diodes (LED) have improved. Total estimated capex for FY23 is budgeted at MYR35-40m. The group is at the preliminary stage of onboarding a new customer and product to diversify its portfolio and grow the business. On this, potential contributions may only start from 2H24 onwards, if everything is smooth sailing.

• Our earnings forecasts are unchanged, since the results are in line. However, we raise our target P/E to 24x from 17x, at +1.5 SD from the 5- year mean, to account for the improved market sentiment on the back of a peaking US Federal Funds Rate and a potential new major customer win. As such, our TP rises to MYR1.42, with a 0% ESG premium/discount built in, based on our in-house proprietary methodology.

• Downgrade to SELL. Its share price has recovered by 38% YTD and 46% over the past three months. At 27x FY24 P/E, its market valuation is expensive, and higher than pre-pandemic levels. As such, we think that optimism over a new customer win is in the price – especially in view of its weak earnings and the uncertain outlook for demand in the chip sector.

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

Source: RHB Research - 26 Jul 2023