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This article first appeared in The Edge Financial Daily on August 20, 2019

Salutica Bhd
(Aug 19, 51 sen) 

Upgrade to buy with a higher fair value (FV) of 61 sen: We doubled our forecast financial year 2020 (FY20F) to FY21F net profit for Salutica Bhd owing to new catalysts from the trade diversion and Customer A’s product regaining positive traction after fixing a connectivity issue. Our FV is pegged to FY20F’s price-earnings ratio (PER) of 14 times.

Customer A is releasing its third generation of true wireless earbuds with an upgraded Bluetooth chipset developed by Salutica, in collaboration with a Netherlands company. The new Bluetooth chipset promised to rectify the connectivity issue which has plagued the previous two models, resulting in Salutica’s declining profit.

Just two weeks into the launch, the new earbuds have earned a reputable rating of four to 4.5 stars on top technology reviewers TechRadar, Wired, Android Central and CNET. Feedback indicated that the new earbuds surpassed market-leading brands from the US and Denmark in its size (compact), battery life (longer) and audio quality (better).

We foresee Customer A making up lost ground with the new earbuds that allow L/R simultaneous connection to the audio source for a more stable connection. 

Meanwhile, the US and Denmark rivals are still using conventional master/slave connection that relies on cross head Bluetooth transmission, which is prone to connection drops. Moreover, Customer A’s earbuds run on Bluetooth 5.0, while its rivals are still on Bluetooth 4.0.

Seeing little hope for the US-China dispute easing, Customer A has begun to move the production of certain computer mouse models from Suzhou, China to Salutica. These are everyday use wireless mouse and are mostly sold to the US.

There are a total of four models being passed on to Salutica. The first model commenced production in July while the remaining three are slated to begin production in the second quarter of FY20 (2QFY20). The volume for mouse production is seven times larger than that for the headset.

We envisage the non-seasonality of everyday mouse to cushion the off-season dips of headset production, particularly in 3Q and 4Q. This will help the company avoid negative surprises. We forecast sales from mouse production to contribute 46% of the group’s revenue in FY20F while headset contributes 48%.

We still expect 4Q to be in the red and maintain our FY19F net loss forecast of RM1.3 million. However, contribution from the new earbuds and mouse production will be captured in FY20. Currently, Salutica is trading at a discounted one-year forward PER of 11 times, representing a 27% upside to our FV. — AmInvestment Bank, Aug 19

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