This article first appeared in The Edge Financial Daily on August 2, 2019
Globetronics Technology Bhd
(Aug 1, RM1.75)
Downgrade to sell with a lower target price (TP) of RM1.47: Globetronics Technology Bhd’s second quarter of financial year 2019 (2QFY19) normalised earnings declined by 13.8% year-on-year (y-o-y) to RM7.4 million. The decline in earnings was mainly attributable to a drastic decline in volume loadings from certain customers of the group.
The dismal 2QFY19 financial performance led to first half (1H) of FY19 normalised earnings of RM11 million. This represents a reduction of 55.3% y-o-y, primarily premised on the phasing out of certain matured products of a Japanese customer and lower volume loadings for products related to the smartphone market. All in, its 1HFY19 normalised earnings failed to keep pace with our and consensus expectations, accounting for 19% and 18.3% of respective full FY19 earnings estimates.
We lower our FY19 and FY20 earnings estimates to RM48.8 million and RM56.1 million respectively as we lower our production volume assumptions for all its major product offerings.
We derive a revised TP of RM1.47 (previously RM1.76) based on dividend discount model valuation methodology.
Soft volume loadings continued to negatively impact the group’s well-being as seen in its 1HFY19 performance. While we expect some earnings recovery in 2HFY19, we opine that it would be insufficient to make up for the underperformance seen in 1HFY19. While we acknowledge the group’s effort to diversify away from the smartphone market, we are of the view that meaningful contributions to its bottom line can only be seen in the later part of FY20.
Given the poor near-term outlook, we expect its share price to come under pressure. We believe the estimated dividend yield of 3.5% to 4% is unable to make up for the anticipated retracement in its share price. All factors considered, we downgrade our recommendation to “sell” from “neutral” previously. — MIDF Research, Aug 1