Review

• Elsoft’s 9MFY19 core net profit of RM13.9mn (-57.9%) came below our estimates at 56.0%. The miss was due to weaker-than-expected demand for the group’s automated test equipment generally as customers exercised cautiousness on capex spending against the backdrop of the trade war, while some had also overinvested in the previous year, hence not having to expand capacity.

• YoY. 9MFY19’s revenue and core net profit declined 58.1% and 57.9% to RM27.3mn and RM13.9mn. This was mainly due to lower demand for the group’s automated test equipment across all segments including smart devices, automotive, and general lighting. Notwithstanding the softer business activity, the group’s robust profitability was well maintained with EBITDA and core net profit margins at 53.2% (+1.9pp) and 51.0% (+0.2pp) respectively, aided by higher investment income.

• QoQ. 3QFY19’s revenue and core net profit declined 60.7% and 55.5% to RM4.9mn and RM2.7mn mainly due to lower demand for the group’s automated test equipment across all segments except for general lighting. Revenue was also at the lowest since 2QFY15.

• Meanwhile, a third interim dividend of 0.5sen/share (-60.0%) was declared. YTD’s of 2.5sen/share (-25.0%) represents a payout of 120.2%. We remain comfortable on the group’s generous dividend payout of above 100% as this is supported by its healthy balance sheet with its net cash position (including other investments) as at 3QFY19 at RM63.4mn or 9.5sen/share.

Impact

• In view of the weaker-than-expected demand for the group’s automated test equipment, we have lowered our sales assumptions and correspondingly, our FY19/FY20/FY21 earnings estimates are cut by 26.4%/8.6%/8.5%. We now forecast sales growth in the corresponding period at -53.8%/+67.0%/+6.2% versus -37.1%/+34.1%/+5.7% previously. We also reduced our dividend assumptions for FY19/FY20/FY21 from 4.0/4.1/4.3sen to 3.0/4.7/5.0sen.

Outlook

• We expect the group’s performance in the near term to remain challenged by the on-going trade war. That said, we view growth opportunities from upcoming products under research and development. This includes: 1) new series of automated test equipment for both the smart devices (LED flash tester) and automotive (multibeam LED headlamp tester) segments which were the group’s key drivers over the years with their combined contributions consistently above 80% of the group’s revenue, and 2) embedded controllers for the medical segment.

Valuation & Recommendation

• Corresponding to the earnings cut, our TP for Elsoft is lowered to RM0.70/share (previously RM0.77/share) based on an unchanged of 15.0x against CY20 EPS which is -0.5SD the stock’s 5-year mean of 19.0x. Reiterate Sell as we opine the stock is fairly valued at current levels. Key downside risks include single customer concentration and poor acceptance of new products.

Source: TA Research - 25 Nov 2019