Review

• Elsoft Research Berhad’s (Elsoft) 9MFY20 core net profit of RM4.4mn (- 65.7%) accounted for 27.3% of our full-year estimates. We deem results to have missed expectations as we earlier expected the group to see a strong pick up going into 2HFY20 alongside the easing of the movement control order. Core net profit mainly excludes loss on disposal of other investment of RM1.2mn and gain on fair value adjustment of other investment of RM0.8mn.

• YoY. 9MFY20 revenue and core net profit declined 51.6% and 65.7% to RM13.2mn and RM4.4mn respectively mainly due to lower demand for the group’s automated test equipment (ATE) as amid the COVID-19 pandemic its customers have turned cautious on CAPEX, and travel restrictions have delayed the delivery of projects to customers abroad. To a lesser extent, earnings was also hurt by higher share of loss from associates of RM0.5mn.

• QoQ. 3QFY20’s core net profit rose >100% to RM1.9mn on higher revenue and positive share of contributions from associates. Revenue increased 12.7% to RM4.7mn, partly driven by the automotive segment.

• Meanwhile, no dividends were declared during the quarter and the group’s financial standing remained strong with a net cash position including other investments of RM64.6mn or 9.6sen/share (+4.7% QoQ, +1.8% YoY) as at end-3QFY20.

Impact

• We have cut our FY20 earnings estimates by 54.3% after lowering our sales forecast by 39.4% to reflect 3QFY20 actual results and on expectations for weakness to persist towards end-FY20.

Outlook

• While FY20 is set to be a disappointing year for Elsoft due to disruptions from COVID-19 headwinds, we remain sanguine on the group’s prospects in FY21, which we expect to be driven by backlogs from FY20 as well as opportunities from: 1) newer ATEs including automotive headlamp tester catered to multibeam headlamps and smart devices LED flash tester designed for the next evolution of smartphone flash module, and 2) the medical devices segment which has been focusing on more cost effective, compact, and portable embedded controllers for peritoneal dialysis machines.

Valuation & Recommendation

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

Source: TA Research - 23 Nov 2020