Review

• Elsoft’s 1HFY23 core net profit of RM5.4mn (-27.1% YoY) came within our full-year estimates at 53.3%. The weak results is aligned with cautiousness on capital expenditure amid the semiconductor industry’s downcycle.

• YoY. 1HFY23’s core net profit declined 27.1% YoY to RM5.4mn mainly due to weaker demand for automated test equipment (ATE) and burn-in systems amid the global economic slowdown and the semiconductor sector's downcycle. Revenue dropped 33.3% YoY to RM10.7mn. Earnings was also hit by lower share of profit in associate.

• QoQ. 2QFY23’s revenue increased 34.1% QoQ to RM6.1mn, driven by demand from the smart devices industry. However, core net profit fell 7.2% QoQ to RM2.6mn due to a less favourable product mix.

• Elsoft maintained its robust financial standing with a net cash position of RM95.3mn or 13.8sen/share (-9.2% QoQ, +38.0% YoY) as at end- 2QFY23.

Outlook

• For 2HFY23, Elsoft continues to anticipate weak demand for its ATE and burn-in systems as customers remain cautious about capital expenditure amid the global economic slowdown and the semiconductor sector's downcycle. As of August 2023, Elsoft’s order book stood at ~RM9.0mn.

• Beyond near-term weakness, we continue to view catalysts for Elsoft from recently acquired Xyrius and ii) the impending commercialisation of embedded controllers designated for peritoneal dialysis machines. Of note, Xyrius, a designer and manufacturer of customised automation equipment, is expected to help enhance the automation capabilities of Elsoft’s ATE and burn-in systems and thus, its competitiveness versus peers.

Impact

• We have revised our FY23F/FY24F/FY25F earnings estimates by +1.9%/+3.9%/+5.0% as we impute the completed acquisition of Xyrius.

Valuation & Recommendation

• Corresponding to our earnings upgrade, we arrive at a slightly higher TP of RM0.58 (previously RM0.575) based on a PE multiple of 24.0x against CY24F EPS. Maintain Hold. We would view rerating catalysts to include stronger-than-expected demand for its ATE and burn-in systems, as well as traction with the acquisition of Xyrius, and the commercialisation of embedded controllers designated for peritoneal dialysis machines.

• Key risks include lower-than-expected demand for ATE and geopolitical tensions weighing on economic growth and disrupting supply chains.

Source: TA Research - 21 Aug 2023