This article first appeared in The Edge Financial Daily on August 2, 2018

Globetronics Technology Bhd
(Aug 1, RM2.60)
Maintain buy with a higher target price of RM3.56: Globetronics Technology Bhd’s revenue and earnings for the second quarter of financial year 2018 (2QFY18) contracted for the second sequential quarter on softer sensor volumes as weak demand for its end-customer products resulted in a curtailment of inventory in the supply chain. This was nevertheless only attributable to light sensors, a high-volume product accounting for more than 60% of Globetronics’ sensor capacity. Production volume for its gesture sensors, which fit into wireless headsets, was not impacted by the inventory rebalancing. In short, light sensor volumes continued to taper from March through May, although we understand that its inventory is likely to have been fully worn down by end-2QFY18.

As sensor production volume is still higher on a year-on-year (y-o-y) basis, despite the weak 2QFY18, Globetronics’ revenue and earnings for the first half of FY18 (1HFY18) registered growth of 40% and 85% y-o-y respectively. 1HFY18 earnings before interest, taxes, depreciation and amortisation margin was significantly stronger at 26% (+5.1 percentage points y-o-y), driven ultimately by higher contribution from the sensor segment (sensor revenue in 1HFY17 was 15% compared with 42% in 1HFY18). Results were within our expectations, accounting for 28% of our forecast (33% of street’s). We expect a stronger 2HFY18 as production volume for its light sensors normalises, to meet demand for its customer’s new product launch in 3QFY18 coupled with additional capacity for its gesture sensors, which would be key to the stronger 2HFY18.

We remain positive about Globetronics as the company positions itself as a niche sensor play. Meanwhile, its move into the assembly of automotive laser headlamp modules later this year could further rerate its valuation multiples. — Affin Hwang Capital, Aug 1