Globetronics Technology Bhd
(Jan 20, RM4.80)
Maintain buy with a higher target price (TP) of RM5.20 from RM5: Apart from the proximity sensor division whose monthly production volume is now at 20 million units (up from 15 million to 16 million units last year), Globetronics Technology has also started to ramp up production for a new wearable sensor module in the late fourth quarter of 2014 (4Q14) (about three million units per month).

We believe this will underpin the growth of its sensor division in the financial year 2015 (FY15), when revenue contribution is forecast to rise to 41% compared with the expected 32% in FY14.

The quartz timing devices and light-emitting diodes (LED)/solid-state lighting (SSL) divisions are likely to post decent revenue growth of 10% to 15% in FY15. Globetronics expects volume to ramp up for quartz timing devices given the new product transfer from its Japanese customer by  2Q15.

For LED/SSL, while volume will increase by 40% due to new product transfer from Cree Inc since late-4Q14, this will however be partly offset by price erosion, in line with end-market dynamics.

FY15 capital expenditure (capex) is budgeted at RM40 million to RM45 million, the bulk of which will be for the sensor division. To improve productivity, some of the capex will also be spent on automation, particularly of the final inspection process.

In terms of foreign exchange (forex) exposure, about 60% and 70% of Globetronics’ revenue and cost are based in US dollars. We raise FY15 to FY16 earnings per share (EPS) by 5% after adjusting our forex assumptions to RM3.40 per US dollar.

Maintain “buy” with revised RM5.20 TP pegged to 18 times FY15 EPS. We continue to like the stock for its earnings growth prospects, decent 5% dividend yield and high return on equity of 28%. — Alliance DBS Research Sdn Bhd, Jan 20

This article first appeared in The Edge Financial Daily, on January 21, 2015.