• Still NEUTRAL, new MYR0.68 TP from MYR1.21, 10% upside, c.2% yield. Globetronics Technology is expected to be negatively impacted by the unfavourable FX movement given its USD-denominated revenue base, but this can be mitigated through process improvements and renegotiations. Although the share price took a beating, we retain our call, given the lacklustre earnings outlook (with slower topline and lower dividend payouts) on top of potential risks from the major changes in strategies and execution.

• FX impact. GTB’s exposure to USD-based revenue is around 60-70%, and it is partially hedged by its USD purchases, which typically make up 40-50% of COGS. A 1% FX depreciation could result in a 1-2% impact to bottomline, ceteris paribus. The margins compression stemming from the negative FX movements can be passed on to customers through renegotiations, revised quotations, and engineering and process efficiencies.

• 1H24 earnings recap. 1H24 revenue of MYR57.7m and core earnings of MYR9.5m were below estimates due to slower-than-expected loadings for sensor products, given the lower allocation and weaker demand for smart devices. Still, bottomline grew 39.4% YoY from a low base in 1H23, supported by EBITDA margins recovery to 33.9% (1H23: 24.7%) – thanks to favourable FX movements. However, operations cash flows swung to the negative due to a substantial increase in other receivables of MYR65.6m.

• Outlook. We expect volume loadings for gesture and light sensor products to be stable, with an upside bias at around the 17-21m range given the stronger 2H seasonally – this is in anticipation of the ramp-up to the new smartphone cycle. Existing light-emitting diode or LED volume loadings should also remain stable. With the growth saturated, management is looking to diversify its portfolio into other products and customers.

• Earnings and TP. We factored in the stronger MYR/USD to be in line with our in-house FX assumption to 4.40, 4.05, and 4.20 from 4.50, 4.20, and 4.30, and took the opportunity to lower the loadings for its sensor products, given the lower allocation and uninspiring sales. These resulted in FY24F-26F earnings cuts by 23%, 27%, and 22%. Consequently, our TP is cut to MYR0.68, as we peg to a lower 20x (was 25x) FY25F P/E, at 5-year mean, following the disappointing results and outlook. We also bake in a 2% ESG discount, given GTB’s ESG score has been revised down to 2.9 from 3.1 – this resulted from the tweak in score for the governance pillar amid the recent resignation of its auditors.

• Key downside 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.

Source: RHB Research - 9 Oct 2024