• Maintain NEUTRAL and MYR1.45 TP, 4% upside with c.3% FY24F yield. Globetronics Technology’s 9M23 core profit of MYR15.9m (-49.5% YoY) met our but missed the Street estimate. Lower volume loadings from main customers and higher input costs led to narrower margins and decreased profitability. 4Q volume loadings should soften on the slow season and the uninspiring volume of orders related to the new range of smartphones. GTB is fairly valued, as its near-term earnings weakness is weighted against a better FY24F, backed by potential new customers/programmes.

• Within our but below Street expectations. 9M23 revenue and core profit of MYR99.3m (-27.2% YoY) and MYR15.9m are at 64% and 56% of our and Street full-year estimates. The results are within our but below the Street’s expectations, as 2H is typically a stronger period that brings the majority (60- 70%) of Globetronics’ full-year earnings. The sharp contraction in profitability this year was undermined by lower demand for sensor products, increases in utility and staff costs, higher tax expenses and margin compression (9M23 EBITDA margin: 29.3% vs 9M22’s of 37.2%).

• Lower loadings due to sluggish demand. The group’s 3Q23 revenue contracted 24.8% YoY to MYR34.6m on the back of lower volume loadings. However, higher volume on seasonality helped to boost the overall utilisation rate to 72% from 66% in 3Q23. These, coupled with favourable FX movements, led to a sharp 136% QoQ improvement in core earnings.

• Outlook. The volume loadings for both gesture and light sensors are set to decline by 10-15% into 4Q (from 18m-22m currently) with downward revisions in the December low season, given the uninspiring sales volume from the new smartphone range. Meanwhile, shipping volumes of quartz crystal timing devices remain soft, and the company may further rationalise and discontinue production of these. Loadings for light-emitting diodes or LEDs have improved marginally, with some new programmes lining up for FY24. Total estimated capex for FY23 is budgeted at MYR30m. The group is looking to diversify its portfolio and expand into new sensor components, as well as win new customers. However, potential contributions from such efforts may only start kicking in towards end-2024.

• Our earnings forecasts and TP are unchanged, since the results are in line. Our TP of MYR1.45 is based on 24x P/E (at +1.5SD from its 5-year mean), and include a 2% ESG premium applied, based on our in-house proprietary methodology. The successful on-boarding of a new customer with near-term major earnings contribution coupled with improved loadings from the sector could potentially be re-rating catalysts, in our view.

• Key risks: i) Further weakening of smartphone and peripheral sales; ii) stronger MYR vs USD; and iii) a major product and/or customer loss. The converse represents the upside risks.

Source: RHB Securities Research - 25 Oct 2023