Review

• Elsoft reported 2QFY18 core net profit of RM11.4mn (+39.6% QoQ, +57.7% YoY), bringing 1HFY18’s cumulative to RM19.6mn (+65.4% YoY). This came within ours and consensus estimates at 54.3% and 46.0% respectively.

• Separately, a second interim dividend of 3.0sen/share was declared. On a YTD basis, dividends of 5.0sen/share translates into a dividend payout of 68.7% - in line with guidance for dividend payout at ~70%.

• QoQ, revenue grew 46.5% to a historical high of RM24.2mn. This was driven by the smart devices segment on the back of increased delivery of its new series of flash tester for an upcoming smartphone model. We expect the segment’s contributions to sustain into 3QFY18 before moderating in 4QFY18. EBITDA and core net profit margins remained robust near 50% levels, respectively at 48.3% and 47.3%.

• 1HFY18’s core net profit growth (+65.4% YoY) outpaced that of revenue (+38.5% YoY) due to a better product mix. As a percentage of revenue, contributions were led by the smart devices segment at 72.4% (+45.0pp YoY) and this was followed by the automotive segment at 17.8% (-42.4pp YoY) and general lighting segment at 8.4% (-0.9pp YoY).

• Meanwhile, the group’s financial position remained healthy with a net cash position of RM60.3mn or ~22.0sen/share.

Impact

• We maintain our earnings estimates.

Outlook

• We remain sanguine on the group’s growth prospects. For FY18, we project its revenue and net profit to grow by 13.5% YoY and 21.2% YoY, underpinned by the smart devices segment on higher delivery of the new series of flash tester for an upcoming smartphone model. The group’s order book of RM36.0mn as at end-2QFY18 (1QFY18: RM50.3mn) is expected to be realised in 2HFY18 across the smart devices, automotive and general lighting segment.

• Meanwhile, the group remains focused on the research and development of new test equipment for: 1) its existing smart devices and automotive segments, namely for the next generation led flash tester and automotive headlamp tester, as well as 2) IR/VSCEL devices. The latter is a prospective market in view of the robust growth outlook for the 3D imaging and sensing market, which Yole Development projects to grow at a 5-year CAGR of 37.7% to reach US$9bn by 2022.

Valuation

• We raise our TP for Elsoft to RM3.75/share upon raising our PE multiple to 25.0x (from 22.0x previously). This is premised on prospects of the group potentially benefitting from growing interest by manufacturers to set up operations in countries like Malaysia following the escalation in trade tensions between the USA and China. Apart from this, we continue to like Elsoft for its research and development capabilities, relevant product offerings, rich margins and robust balance sheet. Reiterate Buy. Key risks include single customer/product risk and lack of recurring business.

Source: TA Research - 20 Aug 2018