Review

• Elsoft reported 4QFY18 core net profit of RM6.2mn (-54.1% QoQ, -19.7% YoY). This brought FY18’s core net profit to RM39.3mn (+44.5% YoY) which came above ours (due to higher than expected revenue) but within consensus estimates at 108.7% and 99.9% respectively.

• A 4th interim dividend of 1.25sen/share was declared. YTD’s of 4.58sen/share (+38.9% YoY) translates to a payout of 76.0% which is well above the group’s minimum 40% dividend payout policy.

• FY18’s revenue and core net profit grew 26.5% YoY and 44.5% YoY to RM78.2mn and RM39.3mn, both at a record high. The robust performance was driven by higher demand for smart devices LED flash tester catered mainly for a major brand’s new smartphone product line in 2018.

• In 4QFY18, core net profit declined 54.1% QoQ and 19.7% YoY as the bulk of test equipment to be delivered during the year were scheduled across 2QFY18 to 3QFY18. While volumes were lower, profitability remained rich with EBITDA margins at 55.6% (+0.8pp QoQ, +6.7pp YoY).

• Meanwhile, the group’s net cash position stood at RM54.1mn or ~8.2sen/share (-19.9% QoQ and unchanged YoY).

Impact

• Upon imputing FY18’s figures into our model, our FY19/FY20 earnings estimates are revised by +0.6%/+1.3% to RM29.6mn/RM35.6mn. We also introduce our FY21 forecast of RM38.1mn.

Outlook

• For FY19, our projections are for the group’s revenue to decline 25.0% YoY on expectations for demand for new equipment to only pick up in FY20 as prototypes undergo qualification by customers. The new equipment includes the: 1) next generation LED flash tester and 2) automotive headlamp tester.

• Meanwhile, we view upside from the group’s on-going R&D of new test equipment for IR/VSCEL devices which if successful will open up opportunities from the prospective 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

• Our TP for Elsoft is revised slightly higher to RM0.81/share (previously RM0.80/share) based on an unchanged PE of 18.0x. A faster than expected pick-up in demand for the group’s new products will be a rerating catalyst for the stock. Reiterate Sell. Key risks include single customer/product risk and lack of recurring business.

Source: TA Research - 25 Feb 2019