• Maintain NEUTRAL, with new MYR1.21 TP from MYR1.29, 8% upside and c.3% FY25F yield. 1H24 core earnings of MYR9.5m (+39.4% YoY) missed expectations due to slower-than-expected topline despite margin expansions from favourable FX movement. We dial back our expectations and anticipate a year of contraction for FY24F, before rebounding in FY25F with potential contribution from new programmes. Current valuation looks fair given the dull near-term outlook despite the share price taking a beating.

• Missed. 1H24 revenue of MYR57.7m and core earnings of MYR9.5m were below estimates, at 28.4% and 27.3% of our and Street full-year forecasts. The slower-than-expected loadings for sensor products given the lower allocation and weaker demand for smart devices affected topline, leading to the underperformance. Still, bottomline grew 39.4% YoY from a low base in 1H23, supported by EBITDA margin recovery to 33.9% (1H23: 24.7%) – thanks to favourable FX movements. However, operation cash flow swung to the negative due to a substantial increase in other receivables of MYR65.6m. No dividend was declared for 1H24 (1H23: 1 sen), below expectations.

• Slow loadings persist. 2Q24 loadings were unexciting, with revenue coming in lower (-7.2% QoQ and 11.9% YoY) at MYR27.8m despite favourable forex movements. Consequently, core profit plummeted by 25.4% QoQ and 28.7% YoY. Margins recovered on the back of better product mix and forex effects partially cushioned the overall lacklustre recovery.

• Volume loadings stable. We expect volume loadings for gesture and light sensor products to be stable with an upside bias at around the 17-21m range given the stronger 2H seasonally in anticipation of the ramp-up to the new smartphone cycle. Existing light-emitting diode (LED) volume loadings should also remain stable. Total capex for FY24 is budgeted at MYR50m, mainly for machinery, equipment, and infrastructure upgrades to support its potential new businesses in the new memory-based packaging.

• Earnings. We cut our FY24F-26F earnings by -33.1%, -21.2%, and -20.8%, as we reduce our revenue and margin assumptions given the slow recovery and lower allocation. Consequently, our TP is reduced to MYR1.21 after we roll forward our valuation base year to FY25, based on an unchanged 25x P/E (+1SD from its 5-year mean). We bake in a 2% ESG premium given Globetronics Technology’s ESG score of 3.1 is above country median.

• Ratings. We keep our NEUTRAL call as we now expect a contraction in FY24 given the slower topline and dividend payout on top of potential risk from the changes in the management team and strategies. Meanwhile, the successful onboarding of a new customer with near-term earnings contribution, and the significant improvements in end-product sales are the re-rating catalysts that can alter our call. Key risks: i) Further weakening of smartphone and peripheral sales, ii) a stronger MYR vs the USD, iii) major product and/or customer losses, and iv) major changes in the current management team. The converse represents the upside risks.

Source: RHB Research - 26 Aug 2024