A transitory disturbance in the force

Globetronics has not been spared the recent sell-down due to slowdown in global smartphone sales and production cuts by smartphone players. Management has guided for a 20%-25% cut to its proximity sensor production for 1Q16, and expect recovery in mid-2Q16 to cater for new smartphone launches. Production of the 3D-imaging sensor has also been delayed to Feb 2016 from Dec 2015. The sensor division makes up 42% of FY15 revenue. Nonetheless, sustained USD strength should cushion earnings downside. We lower earnings forecasts, maintain BUY call.

Trim FY15-17 earnings by 2%-5%

Accounting for the slowdown in demand of the proximity sensors and delay in the 3D-imaging sensor production, we reduce Globetronics’ FY15/16/17 net profit forecasts by 5%/5%/2% (our revised revenue breakdown in table overleaf). Correspondingly, our TP is lowered to MYR8.00 (-2%) on an unchanged 17x CY17 EPS peg.

Earnings downside cushioned by USD’s strength

The net USD export story remains intact for Globetronics (60%/70% of revenue/COGS denominated in USD) as the MYR remains weak against USD, trading at USD1/MYR4.39 currently, 7% above our 4.10 average base assumption. Our sensitivity analysis shows a ~1% impact on earnings for every 1% change in our USD/MYR base assumption, ceteris paribus.

Rising adoption of sensor products to drive growth

Globetronics’ share price has fallen 9% from its recent high of MYR6.90 on 5 Jan 2016 as investors may have overreacted to news of Apple’s production cut. Looking beyond the current smartphone models which are prone to cuts due to the transition of component changes in the new model, we expect a recovery from 2Q16 as we believe that the next generation models (to be launched in 3Q16) will be packed with higher and newer sensor content (3D-imaging sensor; two per device) which anchors our 61% earnings growth forecast in FY16. At 14.9x CY16 PER currently, Globetronics offer a decent 29% upside backed by 6.0% yield. Reiterate BUY as our preferred pick in our MY semiconductor space.

Source: Maybank Research - 11 Jan 2016