Review

• Elsoft’s 1QFY20 core net profit of RM1.6mn (-47.6% QoQ, -62.9% YoY) came below our full-year estimates at 5.9%. Exceptional items stripped off mainly includes RM1.8mn loss on disposal of other investments.

• The miss was mainly due to lower-than-expected demand for automated test equipment (ATE) and partly due to disruptions to production, delivery, and setup following the government’s mandated movement control order (MCO) amid the COVID-19 pandemic.

• 1QFY20’s core net profit fell 47.6% QoQ and 62.9% YoY to RM1.6mn as revenue declined 31.8% QoQ and 57.8% YoY to RM4.3mn on lower demand for ATE and delayed overseas delivery and setup due to travel restrictions.

• Elsoft declared a 1st interim dividend of 0.25sen (1QFY19: 1.00sen). The group’s dividend paying ability is comfortably backed by its strong balance sheet. Its net cash position (including other investments) as at end-1QFY20 stood at RM62.7mn or 9.4sen/share (-7.8% QoQ, -12.6% YoY).

Impact

• We have lowered our FY20/FY21 earnings estimates by 41.4%/15.2% to RM16.3mn/RM27.7mn after cutting our sales assumptions by 41.0%/14.5%.

Outlook

• While we were earlier optimistic for FY20 to be a better year for Elsoft, we now expect its performance to be muted YoY due to disruptions to operations (i.e., prolonged delivery, setup, qualification, and acceptance of its ATE by customers) posed by the COVID-19 pandemic. With the MCO extending into 2QFY20, we expect to see continued weakness during the quarter but with improvements in 2HFY20.

• Notwithstanding, there remains prospects for the group from its new series of ATE as well as medical devices which if well received by customers would present upside to our forecasts and be a re-rating catalyst. Its new series of ATE include the smart devices segment’s LED flash tester designed for the next evolution of smartphone flash module and automotive segment’s headlamp tester catered to multibeam headlamps which are still in a nascent growth stage.

Valuation & Recommendation

• Following the earnings downgrade and rolling forward our base year valuation to CY21 based on a PE multiple of 15.0x, our TP for Elsoft is lowered slightly to RM0.62 (previously RM0.63). And with the unfavourable risk reward potential at current levels, we downgrade our recommendation on Elsoft from Buy to Sell. Key risks include: i) prolonged COVID-19 pandemic, ii) single customer concentration, and iii) poor acceptance of new products.

Source: TA Research - 27 May 2020