This article first appeared in The Edge Financial Daily, on January 12, 2016.

Globetronics Technology Bhd 
(Jan 11, RM6.35) 
Maintain buy with a lower target price (TP) of RM8: Globetronics Technology Bhd has not been spared the recent selldown due to a slowdown in global smartphone sales and production cuts by smartphone players. Management has guided for a 20% to 25% cut in its proximity sensor production for the first quarter of 2016 (1Q16), and expect recovery in mid-2Q16 to cater for new smartphone launches. 

Production of the 3D-imaging sensor has also been delayed to February 2016 from December 2015. The sensor division makes up 42% of financial year ended Dec 31, 2015 (FY15) revenue. Nonetheless, a sustained US dollar strength should cushion any earnings downside. We lower our earnings forecasts, and maintain a “buy” call. 

Accounting for the slowdown in demand for the proximity sensors and delay in 3D-imaging sensor production, we reduce Globetronics’ FY15, FY16 and FY17 net profit forecasts by 5%, 5% and 2% respectively. Correspondingly, our TP is lowered to RM8 (-2%) on an unchanged 17 times calendar year 2017 (CY17) earnings per share peg. 

The net US dollar export story remains intact for Globetronics (60%/70% of revenue/cost of goods sold were denominated in US dollars) as the ringgit remains weak against the US dollar, trading at 4.39 currently, 7% above our 4.10 average base assumption. Our sensitivity analysis shows a 1% impact on earnings for every 1% change in our US dollar/ringgit base assumption, ceteris paribus. 

Globetronics’ share price has fallen 9% from its recent high of RM6.90 on Jan 5, 2016, as investors may have overreacted to news of Apple Inc’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 (a 3D-imaging sensor, two per device), which anchors our 61% earnings growth forecast for FY16. 

At 14.9 times CY16 price-earnings ratio currently, Globetronics offers a decent 29% upside backed by a 6% yield. We reiterate “buy” and it as our preferred pick in our Malaysian semiconductor space. — Maybank IB Research, Jan 11