This article first appeared in The Edge Financial Daily on July 3, 2017 - July 9, 2017

Globetronics Technology Bhd
(June 30, RM6.09)
Maintain buy with a higher target price (TP) of RM7.65: Globetronics Technology Bhd’s share price has risen by 75% year to date, driven by production ramp-up for its light and gesture sensors. We expect the stock to be rerated further from higher volume for the light sensors (especially in 2018), which has yet to be factored in by consensus. Following our earnings revision, we raise our TP to RM7.65 based on 18 times price-earnings ratio (PER) for the financial year ending Dec 31, 2018 (FY18), up from 17 times. We believe valuation could be well supported at 17 to 18 times PER given strong earnings growth driven by 3D sensing adoption in smartphones, which would be a multi-year trend for Globetronics and its Swiss customer. The stock currently trades at FY18 PER of 14.2 times versus global peers’ (involved in 3D sensing) average of 18.7 times.

Consensus has yet to factor in higher volume for light sensors. Globetronics has recently committed to an additional RM20 million investment on top of its RM60 million capital expenditure (capex). The additional capex will be used to expand light sensor capacity to 35 million to 36 million units per month, which we interpret as a strong indication that volume could scale up further than our 27 million to 29 million units per month assumptions for FY17 to FY19. Consensus has yet to factor in higher volume for light sensors (especially FY18 to FY19) as there is little narrative from the supply chain so far to suggest this.

We believe reasons for the higher volume will become clearer as usual launch timing of new smartphone models by the North American customer in September draws near. This would serve as a catalyst for Globetronics, alongside any positive guidance by its Swiss customer during the July earnings season that could give more colour on the volume ramp-up and new sensor pipeline going into FY18.

The key risk to our view is single-customer risk. Globetronics has only one customer for its sensor division. In addition, the sensor products are also supplied to a single end customer currently. — AllianceDBS, June 30