Review

• Elsoft Research Bhd’s (Elsoft) FY20 core net profit of RM7.7mn (-49.9%) came within our full-year estimates at 103.1%. Headline net profit of RM0.7mn (-95.9%) was dragged by an impairment loss of RM5.0mn recognised on its investment in associate, Butterfly House (PG) Sdn Bhd which operates a butterfly farm.

• YoY. FY20 revenue and core net profit declined 46.0% to RM18.1mn and 49.9% to RM7.7mn respectively mainly due to lower demand for the group’s automated test equipment (ATE). Amid the COVID-19 pandemic its customers have controlled CAPEX while travel restrictions have also delayed the delivery of projects to customers abroad. To a lesser extent, earnings was also eroded by share of loss from associates of RM0.4mn.

• QoQ. 4QFY20’s core net profit increased 69.4% to RM3.2mn as revenue increased 4.1% to RM4.9mn.

• Elsoft declared a third interim dividend of 0.5sen (4QFY20: 0.5sen). The group remained on strong financial standing with a net cash position including other investment of RM64.9mn or 9.7sen/share (+0.6% QoQ, -4.4% YoY) as at end-4QFY20.

Outlook

• Due to prevailing COVID-19 headwinds, management expects 1HFY21 to remain challenging for the group. Nevertheless, we expect Elsoft to see improvements in FY21, with 2HFY21 driven by backlogs from FY20. We also view opportunities from: i) its 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 ii) the medical devices segment which has been focusing on more cost effective, compact, and portable embedded controllers for peritoneal dialysis machines.

Impact

• Aligned to management’s expectations for the challenging operating environment to prevail in 1HFY21, we have lowered our FY21/FY22 earnings estimates by 47.6%/16.4% upon cutting sales by 47.5%/16.4%. We also introduce our FY23 earnings estimate of RM33.6mn.

Valuation & Recommendation

• As we roll forward our base year valuation to CY22 and ascribe a higher PE multiple of 20.0x (previously 17.0x) in line with the upward rerating of the semiconductor sector, we revise our target price for Elsoft to RM0.86 (previously RM0.70). However, we downgrade the stock from Buy to Sell as we opine that it is fairly valued at current levels. Key risks include: i) prolonged COVID-19 pandemic, and ii) poor acceptance of new products.

Source: TA Research - 25 Feb 2021