Review

• Elsoft reported a 9MFY17 net profit of RM21.3mn (+15.6% QoQ, -4.7% YoY). This made up 68.7% and 64.4% of ours and consensus estimates. We deem this within, as we expect a similarly strong 4QFY17 results. A second interim dividend of 3.0sen/share was declared (YTD: 5.0sen/share).

• Better 3QFY17 revenues (+11.8% QoQ) were achieved on the back of higher demand from the smart devices and general lighting industries. This was underpinned by the development and delivery of a new series of flash tester for a 2018 smartphone model. Partially offsetting this, lower demand was seen in the automotive segment. Margins were relatively stable, with profit increasing 15.6% QoQ.

• YoY. Revenue was flattish (-1.4% YoY) during the year. Increased automotive contributions were offset by weaker smart devices sales. This, we believe, was due to an unchanged number of LED flash for an existing smartphone model. However, smart device sales have recovered during the existing quarter – underpinned by activities related to a 2018 smartphone model. The momentum is expected to carry on till the 1HFY18. Profits declined due to a combination of the lower revenue and higher losses from associates.

Impact

• While we initially expected maiden contributions from the development of new test equipment for IR/VCSEL devices to occur in the 1QFY18, the timeline appears tight. It is now more likely that this will happen towards the 2HFY18. As such, we lower our assumptions of test equipment sold in FY18/FY19 to 37/44. We revise our FY18/FY19 earnings forecasts downwards by 10.4%/2.9% to RM36.9mn/RM42.0mn.

Outlook

• The group’s order book decreased to RM19mn (2QFY18: RM25mn). Nevertheless, we believe this number will recover towards the year-end, driven by expectations of more orders from the smart devices segment. This is underpinned by the development and delivery of a new series of flash tester for a 2018 smartphone model. The momentum should carry on till the 1HFY18.

• Following expectations of a flattish year in FY17, we expect growth to resume in FY18. Research and development activities are underway for a new test equipment for IR/VCSEL devices – to penetrate the 3D imaging and sensing market. Yole Developpement forecasts the 3D imaging and sensing devices market will grow at a 5-year CAGR of 37.7% YoY to reach US$9bn by 2022. Growth is expected to be propelled by the smartphone market, while supported by computing and wearable applications.

Valuation

• Following our earnings cut, we lower our TP for Elsoft to RM2.70/share. This is based on an unchanged PE of 18x and CY18 EPS. We maintain our HOLD recommendation on the stock. We believe the stock is decently valued at existing levels. While there could potentially be upsides from its venture into new test equipment for IR/VCSEL devices, there are still uncertainties at this point in time – with regards to potential volumes and pricing.

Source: TA Research - 20 Nov 2017