• Maintain NEUTRAL and MYR1.45 TP, 4% downside and 3% yield. Globetronics Technology’s FY23 core earnings of MYR24.8m (-46.1% YoY) – dragged by lower volume loadings from main customers coupled with higher input costs and tax expenses – came in within expectations. We expect a better FY24, driven by the gradual recovery of the semiconductor sector and potential contributions from new programmes. However, we believe the current valuations reflect its organic business fundamentals and fully mirrors the near-term earnings potential.

• A washout year. FY23 recorded contractions in both revenue and core earnings to MYR131.8m (-26.5% YoY) and MYR24.8m (-46.1% YoY). This was underpinned by lower demand for sensor products (as a result of slow demand for smart devices), increases in utility and staff costs, and higher tax expenses. Loss of economies of scale brought EBITDA margins down to 32.1% (FY22: 39.9%). The results were within expectations at 99.8% and 96.1% of our and Street’s full-year estimates. Core earnings were flattish sequentially (1.8% QoQ) but were down by 38.9% YoY to MYR8.9m on lower utilisation due slower volume and a planned 2-week year-end shutdown – this was partially cushioned by favourable FX movements.

• New programme line-ups. The volume loadings for sensors products are expected to be flattish-to-decline (by 0-10%) into 1Q24, given the slow- moving new range of smart devices. Loadings for light-emitting diodes or LEDs have improved marginally, with a new customer entering mass production in 2Q24. Meanwhile, quartz crystal timing devices shipping volumes have now completed their phase out. Globetronics’ total estimated capex for FY24 is budgeted at MYR30m. The group is working towards diversifying its portfolio into memory base products. It is also taking in some new generic and outline integrated circuit or IC products to boost its machine and floor space utilisation rates.

• Earnings and ratings. We tweak our FY24F-25F earnings by -3.9% and -4.1% post our model up-keeping exercise and following the release of Globetronics’s full-year numbers. Our TP is unchanged at MYR1.45 – this is based on 25x P/E (was 24x) at +1SD from its 5-year mean and inclusive of a 2% ESG premium applied (based on our in-house proprietary methodology and the group’s 3.1 ESG score). Maintain NEUTRAL, but note that the potential risk of changes in the management team and strategies following a recent share sales by major shareholders could be a de-rating factor that affects our call. Meanwhile, the successful on-boarding of a new customer with near-term major earnings contributions and improved loadings from major customers are the re-rating catalysts that can alter our call.

• Key risks: i) Further weakening of smartphone and peripheral sales, ii) stronger MYR vs the USD, iii) major product and/or customer losses, and iv) discontinuing of the current management team. The converse represents the upside risks.

Source: RHB Research - 21 Feb 2024