Review

• Stripping off exceptional items comprising mainly loss on disposal of other investments amounting to RM1.3mn, Elsoft’s 1HFY20 core net profit of RM2.5mn (-75.6%) accounted for 15.6% of our full-year estimates. We deem results to be within expectation as we expect the group to see improvements in 2HFY20 alongside the ease of the movement control order (MCO) and fulfilment of order backlog from 1HFY20.

• YoY. 1HFY20’s core net profit sank 75.6% to RM2.5mn as revenue declined 62.3% to RM8.5mn mainly on lower demand for automated test equipment (ATE) and delayed delivery to customers abroad amid travel restrictions to contain the COVID-19 pandemic.

• QoQ. 2QFY20’s revenue fell mildly 1.5% to RM4.2mn also due to the aforementioned reasons. However, core net profit dropped more rapidly 43.6% to RM0.9mn due to higher share of loss in associate.

• Elsoft declared a 2nd interim dividend of 0.25sen (2QFY19: 1.00sen), bringing 1HFY20’s to 0.50sen (1HFY19: 2.00sen). Despite its weak performance, we remain comfortable on the group’s dividend paying capacity, which is backed by its strong net cash position (including other investments) that stood at RM61.7mn or 9.2sen/share (-1.6% QoQ, -2.4% YoY) as at end-2QFY20.

Impact

• We maintain our earnings estimates.

Outlook

• We expect Elsoft to see muted earnings in FY20 mainly due to disruptions to its operations during the MCO in Malaysia and lockdowns abroad. That said, we expect the group to deliver improved earnings in 2HFY20, driven by the order backlog from 1HFY20. Notwithstanding, we remain sanguine on the group’s prospects underpinned by continued research and development in its core areas, namely automotive and smart devices. Its upcoming series of ATE include automotive headlamp tester catered to multibeam headlamps and smart devices LED flash tester designed for the next evolution of smartphone flash module.

Valuation & Recommendation

• In all, we maintain our Hold recommendation on Elsoft with an unchanged TP of RM0.70 based on a PE multiple of 17.0x against CY21 EPS. Key risks include: i) prolonged COVID-19 pandemic, ii) single customer concentration, and iii) poor acceptance of new products.

Source: TA Research - 1 Sept 2020