This article first appeared in The Edge Financial Daily on March 28, 2018 - April 3, 2018
Globetronics Technology Bhd
(March 27, RM4.42)
Maintain buy with a lower target price (TP) of RM6.16: Globetronics Technology Bhd’s sensor volumes will likely be weaker in first quarter of 2018 (1Q18) and bottom out in 2Q18 due to soft demand for its US customer’s smartphones. However, we do not believe that earnings will collapse like in 2016, when sensor volumes dwindled. We cut our 2018 earnings per share (EPS) estimate by 23% but still expect earnings growth of 67% year-on-year. We forecast 2018 sensor production volumes to be 74% above that in 2017 (and more than three times that in 2016). Hence, the 35% stock-price correction year to date (-20% over the past week) looks overdone in our view, as the 2018 price-earnings ratio (PER) multiple estimate is looking extremely attractive at 15 times, while the company’s earnings growth trajectory is likely to remain strong.
Globetronics’ light sensor production volumes will likely to be softer in 1Q18, but bottom out in 2Q18 with a monthly production volume of 14 million units, resulting in a 23% and 45% quarter-on-quarter (q-o-q) contraction in overall light sensor volumes in 1Q18 and 2Q18 respectively. On a positive note, Globetronics’ sensor customer is guiding for even stronger light sensor volumes in second half of 2018 (2H18), which should compensate for some of the slack in 1H18. Moreover, volumes of Globetronics’ other sensors — gesture, proximity, and motion sensors for wearable products — are holding up well and should soften the blow of the weaker light sensor volume (more than 60% of sensor production volume). We expect production volume for the overall sensor business to contract 16% and 29% q-o-q for 1Q18 and 2Q18 respectively, before a recovery in 2H18.
We lower our average forecast for the monthly production of sensors to 47 million units in 2018 from 56 million units previously. This represents a 16% downward revision, but still a 74% growth over the 2017 production. Our 2018 to 2020 EPS estimates are cut by 23%/4%/5% respectively to account for the change in the light sensor volume forecasts, depreciation charges, and a revision in our ringgit against US dollar assumption.
We maintain our “buy” rating with a lower TP of RM6.16 (based on an unchanged 2018 PER estimate of 20 times). In our view, the current stock price pullback provides an attractive entry point for the stock as PER valuation is more than two standard deviations below its five-year mean. — Affin Hwang Investment Bank Research, March 27
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