Globetronics Technology Bhd
(Oct 26, RM3.56)
Maintain buy with a target price (TP) of RM4: We believe the earnings visibility of Globetronics Technology Bhd is improving with clearer signs supporting the strong earnings recovery in the financial year ending 2017 (FY17) from new sensor products (such as light sensors, gesture sensors and 3D imaging sensors).

This is also underpinned by the recent acquisition of Heptagon (Globetronics’ sensor customer headquartered in Singapore) by AMS AG (AMS), where details revealed by AMS are pointing towards substantial revenue growth for Heptagon starting mid-2017.

Yesterday’s negative share price reaction suggests that investors are worried about Globetronics potentially being dropped as a supplier. In the near term, we don’t think any of the existing arrangements between Heptagon and Globetronics will change post-acquisition by AMS, as Globetronics has been involved in the upcoming new sensor products from the very beginning.

It is unlikely that Globetronics will be replaced because the lead time to qualify for a new supplier will be too tight, especially since it will involve an audit by the end-customer as well. Furthermore, we believe AMS should be familiar with Globetronics because both parties have been working together on the light sensors for quite some time.

Medium- to long-term wise, we think it would be positive for Globetronics because AMS is a much bigger company with a wider range of sensor products, though we cannot not completely rule out the potential risks of Globetronics getting sidelined in favour of AMS’ existing suppliers.

We do not have a clear-cut answer to this, but feel that this is unlikely to happen if Globetronics’ performance meets AMS’ requirements. We believe the key risks for Globetronics is that it has only one customer for its sensor division. In addition, the sensor products are also supplied exclusively to a single end-customer.

The fact that Globetronics is being included and has visibility of its customer’s product road map suggests that the relationship is still strong. — AllianceDBS Research, Oct 26