This article first appeared in The Edge Financial Daily, on October 29, 2015.

Globetronics Technology Bhd
(Oct 28, RM6.05)
Maintain buy with an unchanged target price (TP) of RM6.28: Globetronics Technology Bhd’s third quarter ended Sept 30, 2015 (3QFY15) core net profit of RM16.6 million was 2.1% higher sequentially, despite a 0.4% contraction in revenue, largely underpinned by lower taxation.

At the revenue level, production volumes of proximity sensors edged up to about 21 million units per month for the quarter. This was, however, negated by lower production volumes of wearable sensors. We understand that wearable volumes declined to between two million and 2.2 million units per month from 3.2 million to 3.3 million units per month in 2QFY15, as quality issues at its final product assemblers were resolved.

This potentially also explains the weaker margins in 3QFY15, as the wearable product is a more complex and higher-margin product. The 3QFY15 earnings before interest, taxes, depreciation and amortisation margin was slightly lower at 23.8% versus 25.9% in 2QFY15. Nine-month period ended Sept 30, 2015 (9MFY15) earnings rose 4% year-on-year (y-o-y), in line with expectations.

Cumulatively, Globetronics’ 9MFY15 core net profit of RM48.8 million (+4.4% y-o-y) was in line with expectations, accounting for 66% and 63% of our and street FY15 estimates respectively. We expect a stronger final quarter once the maiden contribution from its 3D imaging sensors and new health sensor kicks in. This should also negate the softer proximity sensor volumes that we are anticipating for 4QFY15.

Our FY15 to FY17 earnings per share (EPS) forecasts, “buy” rating and TP of RM6.28 (based on 16 times our FY16 EPS) are unchanged. While the TP suggests limited upside at current levels, rolling forward our valuation horizon to FY17 would lift our TP to RM6.72.

We continue to like the stock for its strong earnings growth profile and earnings delivery track record, forward-looking management, which has been able to identify strategic growth areas such as its sensor business, and above-market dividend yields of about 6% for FY16. Key risks include a loss of major customers. — Affin Hwang Capital, Oct 28