Review

• Elsoft’s FY19 core net profit of RM18.0mn (-54.1%) came within our full-year estimates at 98.5%.

• YoY. FY19’s revenue and core net profit declined 57.1% and 54.1% to RM33.6mn and RM18.0mn. This was mainly due to lower demand for automated test equipment (ATE) from the smart devices and automotive segment alongside: i) the absence of significant upgrades to a major endcustomer’s smartphone flash module, ii) the slowdown in the global automotive market, and iii) the uncertainty on the trajectory of the trade war between the USA and China. Profitability however improved with EBITDA and core net profit margins up 2.8pp and 3.5pp to 54.8% and 53.7%, lifted by higher investment income.

• QoQ. 4QFY19’s revenue and core net profit grew 28.9% and 49.5% to RM6.3mn and RM4.1mn, driven by the automotive segment as well as higher investment income.

• Elsoft declared a 4th interim dividend of 0.5sen/share (4QFY18: 1.3sen/share). This brought FY19’s dividend to 3.0sen/share (FY18: 4.6sen/share) and represents a payout of 113.2%. We are comfortable with the group’s generous dividend payout as it is backed by its strong balance sheet with net cash position including other investments as at 4QFY19 at RM68.0mn or 10.0sen/share.

Impact

• Our FY20/FY21 earnings estimates are revised by -0.4%/-0.2% to RM30.6mn/RM32.8mn upon imputing FY19 figures into our model. We also introduce our FY22 earnings estimates of RM35.1mn.

Outlook

• We expect FY20 to be a better year for Elsoft, with our revenue and earnings growth forecast of 79.8% and 69.9% to be driven by its new series of automated test equipment catered to the smart devices (LED flash tester) and automotive (headlamp tester) segments. Meanwhile, there are also prospects from its medical devices segment which is currently focused on developing more cost effective, compact, and portable embedded controllers for peritoneal dialysis machines.

Valuation & Recommendation

• In all, we maintain our Buy recommendation on Elsoft with a TP of RM0.89/share based on a PE of 19.0x, in line with the stock’s 5-year mean, against CY20 EPS. We like the group for its research & development capabilities, rich margins, and strong balance sheet. Key downside risks include single customer concentration and poor acceptance of new products.

Source: TA Research - 27 Feb 2020