This article first appeared in Corporate, The Edge Malaysia Weekly, on May 2 - 8, 2016.

GLOBETRONICS Technology Bhd’s recent disappointing quarterly earnings have had investors asking whether it will be the new norm for the electronic component manufacturer down the road. The plunge in net profit in the first quarter and a caution from the company that second-quarter earnings will continue to be weak suggest that its outlook is bleak, at least for the near term.

“Orders received and projections so far show that the demand for our major smart products will remain flat in the near term,” says Globetronics CEO Datuk Heng Huck Lee in an email reply to The Edge.

Last year, sensors for smartphones made up 45% of Globetronics’ portfolio.

Last week, the world’s largest technology company, Apple Inc, reported its worst quarterly results over a decade, as revenue and net profit plunged due to a decline in iPhone sales. iPhone sales make up two-thirds of Apple’s revenue. Analysts have long expected the technology company to record poorer sales and net profit this quarter, but the magnitude of the decline took many by surprise.

Many say the smartphone boom has ended, implying that electronic component manufacturers like Globetronics are unlikely to see stellar growth numbers going forward.

However, Heng opines that the smartphone market is still very sizeable, with over 1.3 billion units sold annually.

“I think it will continue to grow in terms of user base and total volume sold annually. But it may not be the double-digit era anymore. The main challenge for the makers and suppliers will be whether there will be corresponding growth in revenue and profit for them,” he says.

He adds that these days, smartphones, be they the premium or the mid or the lower cost models, have similar features and capabilities, making product differentiation rather difficult. Pricing, he says, has become the main volume driver, which indicates that margins will be squeezed along the entire supply chain.

“All this while, Globetronics has been focusing on new features and functions for the mid-cost and premium models. We are optimistic that there will still be a sizeable market for these models. This market may slow down before it picks up again as more new exciting functions and features are added to the smartphones,” says Heng.

He also says the semiconductor and electronics sector will see flat to very low single-digit growth this year. But he believes that there will be more exciting growth rates in the following year as the sector looks to new opportunities in the Internet of Things.

“Cyclical [swings] are normal for the semiconductor and electronics industry, but there has been continuous growth driven by new innovations,” says Heng.

Globetronics’ share price took a heavy beating recently, plunging from RM5.37 on April 21 to RM3.42 at the close of last Friday. The slide came ahead of its first quarter ended March 31, 2016 (1QFY2016), financial results announcement on April 26.

Heng expresses surprise at investors’ reaction to the results. “If you were to look at Globetronics’ track record, it has been profitable every year since its initial public offering in 1997. We have a very healthy balance sheet and cash flow. The management has always strived to be cost competitive to win business and deliver good returns. We have also maintained generous dividend payouts every year since 1997,” he says.

Last year, the company paid a dividend of 23 sen per share, which works out to a payout ratio of 91%.

Until recently, Globetronics had been a star performer and an investor favourite. Over five years, the counter has risen from 80 sen a share in April 2011 to a high of RM6.60 last December.

Globetronics manufactures sensors, timing devices, LED and semiconductors. Its share price had started to rise as it shifted away from traditional semiconductor manufacturing to the manufacture of smartphone sensors.

As the heavy selling pressure over the last two weeks would suggest, the first-quarter results were a disappointment to the market. Net profit shrank to RM3.68 million from RM17.15 million a year ago, while revenue dipped to RM58.74 million from RM88.7 million previously. The decline in earnings was because of lower volume loadings from some of its customers due to weaker demand. The company also suffered foreign exchange losses of RM4.6 million in the quarter.

“Our first-quarter revenue was in line with our guidance over the past several months. As for the earnings, due to foreign exchange uncertainties, we did not provide any specific guidance, but we did caution about a drop. Our revenue is dependent on our major smartphone customer’s performance. We did anticipate our top and bottom lines to change in tandem with our customer’s projections,” explains Heng.

Even so, four out of five analysts covering the stock have downgraded it from “buy” to “hold” after the results announcement. Target prices from these research houses were also slashed to between RM3.70 and RM4 from between RM7.10 and RM6.66 previously.

“On the back of weaker smartphone shipments y-o-y in 1H2016 and the deferment of the mass production of 3D-imaging sensors to 2017, we now expect Globetronics’ sensor volume to contract 39% y-o-y this year. Along with minor volume cuts in its quart crystal and timing device, LED and small outline integrated circuit divisions, we expect FY2016 revenue to contract 18% y-o-y,” says Maybank Investment Bank Research in a report.

The research house adds that it expects growth to resume in FY2017 with the mass adoption of the 3D-imaging sensor, but it will be offset by a lower US dollar-to-ringgit forecast.

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