Review

• Elsoft’s 1QFY18 core net profit of RM8.2mn (+6.4% QoQ, +77.4% YoY) came within ours and consensus estimates both at 22.7%. A first interim dividend of 2.0sen/share was declared.

• QoQ, revenue declined by 2.4% but core net profit increased by 6.4% due to a better product mix. EBITDA margins expanded by 1.4pp QoQ to 50.5%. Revenue remained driven by the smart devices segment on the back of the delivery of the new series of flash tester for an upcoming smartphone model. We expect the momentum to sustain in the coming quarters.

• YoY, the surge in core net profit by 77.4% was mainly on higher revenue (+11.8%) and lower administrative expenses. The pick up in contributions from the smart devices segment more than offset lower demand from the automotive segment.

• Meanwhile, the group’s balance sheet remained strong with an improved net cash position (including other investment) of RM68.3mn (+1.7% QoQ).

Impact

• We maintain our earnings estimates.

Outlook

• We remain sanguine on the group’s growth prospects. For FY18, we project revenue and profit to grow by 13.5% YoY and 21.2% YoY. This is expected to be driven by the smart device segment on higher delivery of the new series of flash tester for an upcoming smartphone model. As present, its order book is robust at RM50mn.

• Meanwhile, looking to broaden its exposure beyond smart devices, automotive and general lighting, the group continues to focus on 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 maintain our TP for Elsoft at RM3.30/share upon rolling forward our base year valuation to CY19 based on a lower PE multiple of 22.0x (from 25.0x previously). We like Elsoft for its research and development capabilities, relevant product offerings, high margins and robust balance sheet. Reiterate Buy. Key risks include product dependence and lack of recurring business.

Source: TA Research - 28 May 2018