Review

• Elsoft reported 1QFY19 core net profit of RM5.0mn (-18.7% QoQ, -38.6% YoY) which accounted for 17.0% of our estimates. We deem this as within our expectations as we expect stronger performance in the later part of the year driven by new products from the automotive, medical, and smart devices segments. A first interim dividend of 1.0sen/share (+20.0% YoY) was declared.

• 1QFY19 core net profit declined 18.7% QoQ and 38.6% YoY to RM5.0mn as revenue declined 22.5% QoQ and 38.7% YoY to RM10.1mn. The weak performance on a YoY basis was due to lower demand for automated test equipment from the smart devices and automotive segments while that on a QoQ basis was from the general lighting and automotive segments. As a percentage of revenue, contributions by segment were led by smart devices (68.7%) and followed by general lighting (14.6%) and automotive (13.0%).

• Margins remained strong with EBITDA and PAT margin respectively at 53.3% (-2.3pp QoQ, +2.7pp YoY) and 49.7% (+2.4pp QoQ, +0.1pp YoY), aided by higher investment income and administrative expenses.

• Meanwhile, the group remained in healthy financial standing with a net cash position (including other investment) of RM71.7mn or 10.8sen/share (-1.1% QoQ, +4.9% YoY).

Impact

• Our FY19/FY20/21 earnings estimates are lowered slightly by 2.4%/1.8%/1.7% to RM28.9mn/RM35.0mn/RM37.4mn upon performing housekeeping to our model which includes the revision of our forex assumptions to our latest inhouse forecast of RM4.10/USD from RM4.15/USD previously.

Outlook

• Coming off a record year achieved in FY18, we expect FY19’s performance to moderate due to the on-going trade war between the USA and China which has seen spending on equipment by fabs on a downtrend. While the group has new products developed or under development such as that for the automotive (headlamp tester), smart devices (LED flash tester) and medical segment (embedded controllers), we expect demand to pick up towards FY20 as they undergo qualification by customers. The group’s latest order book of RM20mn accounts for 34.2% of our FY19 revenue forecast.

Valuation

• Rolling over our base year valuation, we raise our TP for Elsoft to RM0.80/share (previously RM0.75/share) based on a PE of 15.0x against CY20 EPS, closely in line with the stock’s 5-year mean. Reiterate Sell. Key downside risks include single customer concentration and poor acceptance of

Source: TA Research - 28 May 2019