This article first appeared in The Edge Financial Daily on April 13, 2018

Globetronics Technology Bhd
(April 12, RM4.53)
Upgrade to buy with a target price (TP) of RM5.60: Weak demand for 2017’s North American premium smartphones will translate into lower production in first half of financial year 2018 (1HFY18).

For this, we cut FY18 to FY20 earnings by 11% to 17% and lower our TP to MYR5.60 (-11%), pegged at unchanged 18 times calendar year 2019 (CY19) earnings per share. Nonetheless, we feel that recent selling is overdone (-32% year to date); upgrade to “buy” for 25% upside backed by +3% yield.

There are downside risks to our earnings projections mainly coming from the sensor division, as demand from its end client (North American premium smartphone brand) had softened substantially following the launch

back in September 2017.

Going forward, we are also cautious about the demand for premium smartphones as competition intensifies, mainly from Chinese smartphone brands (that is Huawei, Vivo and Oppo).

Taking into account the expected earnings weakness in the second quarter (2QFY18) due to rationalisation of components by GTB’s end client, we cut our light sensor volume by 18% for FY18.

Going forward, we also lower our volume expectations for light sensor sales by 6% to 9% for FY19 and FY20. Reflecting our conservative stance on GTB’s earnings, our projection remains at the lower-end of street’s expectations.

At our conservative earnings projection, GTB is trading at 14.6 times FY19 price-earnings ratio (PER) currently (13.8 times ex net cash of RM65 million as at end December 2017), offering investment value. Backed by +3% yields (based on 70% dividend payout ratio, risk-to-reward appears attractive.

Our PER peg of 18 times is an average of our PER target for technology stocks within our coverage. — Maybank IB Research, April 11