Review

• Elsoft reported 4QFY17 core net profit of RM8.3mn (-4.6% QoQ, +1.4% YoY), bringing FY17’s cumulative to RM29.6mn (-3.1% YoY). This came within ours but below consensus estimates at 95.4% and 84.5% respectively. With a third dividend of 3.0sen/share declared, FY17’s dividends of 8.0sen/share represents a payout ratio of 73.8%, which is in line with guidance at ~70%.

• QoQ, revenue grew by 5.9% but core net profit declined by 4.6% due to lower other investment income, foreign exchange differences and higher tax rates. Top-line was driven by higher demand from the smart devices segment on the back of the development and delivery of a new series of flash tester for a 2018 smartphone model. This however was partly offset by lower contributions from the automotive segment. Encouragingly, we expect the smart devices segment to sustain the growth momentum.

• YoY, FY17’s revenue growth was flattish (+1.2% YoY). Higher demand from the smart devices segment was offset by lower demand from the automotive segment. Meanwhile, core net profit declined by 3.1% YoY due to foreign exchange differences and losses from the group’s associate company. Core net profit margins remained robust at 46.1% (-2.0pp YoY).

• The group remains on sound financial footing with an improved net cash position of RM12.5mn as at end-2017 from RM11.6mn a year ago.

Impact

• Our FY18/FY19 earnings estimates are revised by -2.1%/-2.0% to RM36.1mn/RM41.2mn upon imputing FY17’s figures into our model and updating our USD/MYR assumptions to our latest in-house forecast of RM4.00/USD from RM4.15/USD previously. We expect the forex impact to be manageable given the expected lower proportion of sales in USD at 30% which should be offset by the 30% to 40% of costs in USD. We also introduce FY20 earnings of RM43.2mn.

Outlook

• Providing comfort, the group’s order book more than doubled to above RM50.0mn during the quarter from RM19.0mn in 3QFY17. We expect this to be underpinned by the new series of smart device flash tester for a 2018 smartphone model. If realised, this accounts for close to 70% of our FY18 sales projection.

• On another note, the impetus for further growth stems from the group’s research and development in new test equipment for IR/VCSEL devices. If it takes off, it would mark the group’s entry into the 3D imaging and sensing market, a growing market thanks to an explosion of consumer applications. Yole Development forecasts the 3D imaging and sensing devices market to grow at a 5-year CAGR of 37.7% YoY to reach US$9bn by 2022.

Valuation

• We revise our TP for Elsoft higher to RM3.30/share based on a higher PE multiple of 25.0x (from 20.0x previously) against CY18EPS. As a benchmark, its larger market-cap peer ViTrox Corporation (Not Rated) is trading at a PE of 30.1x against CY18 EPS. We like Elsoft for its research and development capabilities, relevant product offerings, high margins and robust balance sheet. Upgrade to Buy. Key risks include product dependence and lack of recurring business.

Source: TA Research - 26 Feb 2018