• Maintain NEUTRAL with lower MYR1.29 TP (from MYR1.45), 7% upside. Globetronics Technology’s 1Q23 core earnings of MYR4.6m were a miss. It saw strong 52.8% YoY growth supported by favourable FX movement and interest income, despite lower volume loadings. While we expect a better FY24 performance, driven by the optimism surrounding new product launches by end-customers and potential contribution from new programmes, its current valuations reflect its business fundamentals and near-term earnings outlook.

• A slow start. 1Q24 revenue of MYR29.9m translated into core earnings of MYR4.6m, which accounted for 12.2% and 12.5% of our and Street’s full-year estimates. We deem the results as below expectation on slower-than- expected revenue – despite anticipating a stronger 2H – underpinned by lower loadings for sensor products given the weaker demand for smart devices. EBITDA margins recovered to 31.9% (1Q23: 23%) thanks to favourable FX movements. Sequentially, revenue and core earnings were down 8.1% and 47.9%, respectively, given the seasonally weaker 1Q where volume loadings and utilisation are low.

• Volume loadings expected to be stable. Volume loadings for sensor products are expected to be marginally lower going into 2Q24 from the current 16- 20m range, given the slow-moving smart devices. Existing light-emitting diode (LED) volume loadings should remain stable, while loadings for matured integrated circuits are expected to continue to be slow. Globetronics’ total capex for FY24 is budgeted at MYR50m, mainly for machinery, equipment, and infrastructure upgrades to support its potential new businesses. Recall that management is working on a new memory-based packaging business with potential customers from China and Taiwan, as well as new sensor components and advanced packaging manufacturing solutions.

• Earnings and ratings. We tweak our FY24F-26F earnings by -11.4%, -2.9%, and 3% as we lower our revenue and margin assumptions. As such, our TP is reduced to MYR1.29 based on an unchanged 25x P/E (+1SD from its 5-year mean) and includes a 2% ESG premium (based on Globetronics’ 3.1 ESG score). We maintain our NEUTRAL rating as we do not expect any near-term earnings excitement and note the potential risk of changes in the management team and strategies following the change in its major shareholders. Meanwhile, the successful onboarding of a new customer with near-term earnings contribution, and the significant improvements in end- product sales are re-rating catalysts that can alter our call.

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

Overall ESG Score: 3.1 (out of 4) E: EXCELLENT Globetronics has taken active steps to manage its environmental risks. It has installed solar panels to reduce its greenhouse gas emissions, and water management efforts are in place to reduce water usage and pollution. The group also practices recycling to manage its waste. S: GOOD The group has in place an Environmental, Health and Safety (EHS) team that ensures that its health and safety policies are effectively implemented. The EHS management system is reviewed against international best practices and updated from time to time. G: GOOD Globetronics has applied and adopted majority of the best practices of the Malaysian Code on Corporate Governance. Nevertheless, we note that it has yet to achieve the target of having 30% of women on the board.

Source: RHB Research - 10 May 2024