Review

• Elsoft reported 2QFY19 core net profit of RM6.2mn (+22.6%QoQ, -46.1% YoY). This brought 1HFY19’s core net profit to RM11.2mn (-43.0%), which came below our estimates at 38.7%.

• The miss was due to weaker-than-expected demand for the group’s automated test equipment, which we believe was due to customers cutting back on capex against the backdrop of the trade war. In view of the prevailing headwind, we now expect a similarly weak 2HFY19.

• A second interim dividend of 1.0sen/share (-20%) was declared. YTD’s of 2.0sen/share (-4.0%) represents a payout of 119.8% and conforms to the group’s dividend payout policy of at least 40%.

• We are comfortable with the generous dividend payout of >100% despite Elsoft’s weaker financial performance as it possesses a robust balance sheet with its net cash position (including other investments) of RM63.2mn or 9.5sen/share.

• YoY. 1HFY19’s revenue and core net profit declined 44.8% and 43.0% to RM22.4mn and RM11.2mn. This was attributed to lower demand for automated test equipment. Despite the lower demand, profitability remained robust with EBITDA and core net profit margins at 52.6% (+3.4pp) and 49.8% (+1.6pp) with the improvement contributed by higher investment income and lower administrative expenses.

• QoQ. 2QFY19’s revenue and core net profit increased 22.0% QoQ and 22.6% QoQ to RM12.3mn and RM6.2mn driven by the automotive segment.

Impact

• We have cut our FY19/FY20/YF21 earnings estimates by 13.8%/4.1%/4.7% to RM24.9mn/RM33.5mn/RM35.7mn upon lowering our sales assumptions.

Outlook

• We expect Elsoft’s FY19 financial performance to moderate with revenue and net profit to decline 37.1% and 36.6%. Of note, this follows the record high top and bottom line achieved in FY18, which was largely driven by higher demand for the group’s smart devices LED flash tester to cater to the improved flash LED modules within the new smartphone product line of a major smartphone brand in 2018. On top of that, we also expect the ongoing trade war to weigh on fab equipment spending. SEMI forecasts global sales of semiconductor test equipment in 2019 to decline 16.4% to US$4.7bn.

• On a brighter note, the group has new products developed and under development including those within the automotive (headlamp tester), smart devices (LED flash tester) and medical segment (embedded controllers). However, we only expect demand to pick up towards FY20 as they are progressively qualified and accepted by customers.

Valuation & Recommendation

• Corresponding to the earnings cut, our TP for Elsoft is lowered to RM0.77/share (previously RM0.80/share) based on an unchanged of 15.0x against CY20 EPS which is slightly below the stock’s 5-year mean of 16.9x. Reiterate Sell as we opine the stock is fairly valued at current levels. Key downside risks include poor acceptance of new products.

Source: TA Research - 19 Aug 2019