Initiation: Globetronics Technologies (GTB MK; BUY; TP: MYR6.80): Sensors are tingling

Initiation: Globetronics Technologies (GTB MK; BUY; TP: MYR6.80): Sensors are tingling

• What's New? We initiate coverage on Globetronics Technologies with a BUY with a MYR6.80 TP (18% upside, supported by 4+% net yield) which is based on 17x CY16 PER. Our target PER is a slight premium (17x CY16 PER) to our target PER multiple for Inari Amertron (16x CY16 PER) for superior growth and stronger balance sheet.  
• Company background. Founded in 1991 by two entrepreneurs, Michael Ng Kweng Chong and Tan Chin Kong, Globetronics Sdn Bhd started as an electronics manufacturing services (EMS) company in Penang’s Free Trade Zone, offering basic integrated circuits (ICs) burn-in services to the likes of Intel Corp, ST Microelectronics and Avago Technologies.

Over the years, Globetronics has shifted its focus, deviating from the common semiconductor products and moving up the value chain, to more complicated and higher value products (i.e. micro sensors, timing devices, SSL and LED) and services (i.e. assembly, packaging and testing).

Today, its products and services span four main divisions:

                             I.        Micro-sensors (i.e proximity sensor, wearable sensor);

                           II.        Quartz crystal and timing devices;

                          III.        LED and SSL; and

                          IV.        Integrated circuits (IC) and small outline components or IC (SOIC).

As a result, Globetronics’ customer base has also grown to include various international OEMs (original equipment manufacturers) and ODM (original design manufacturers) such as Epson, Avago, OSRAM, ST Microelectronics and Cree. Over the last four years, Globetronics has gradually shifted away from low margin and common IC/SOIC products to enhance its earnings base by focusing on more complicated and higher value products such as LED/SSL (3-year revenue CAGR of 24%), quartz crystal & timing devices (2-year revenue CAGR of 17%) and more importantly micro-sensors (2-year revenue CAGR of 137%) which is expected to anchor growth in the near future.

• Mid-term catalysts: (i) Bigger contribution of sensors division and (ii) strengthening USD against MYR.

                             I.        Bigger contribution of sensors division which enjoys tax break from its pioneer status until 2022:

·         Promising orders for its wearable sensors (since 4Q14) used in one of the major smart watches recently launched. We expect Globetronics to ship ~3-4m units of optical interface sensors per month over the next three years (FY15-17).

·         Maiden contribution from its 3D-imaging sensors, beginning 4Q15, to be used in the next generation smart devices. While contribution is marginal in FY15, we expect volumes to ramp up to 28m/37m units per month in FY16-17, assuming the need of 2 sensors per device in order to power 3D-imaging capabilities for 180m-200m smart devices, we forecast. We expect this sensor to contribute an additional MYR147m/MYR186m to Globetronics’ FY16/17 revenue, premising our 33% revenue growth in FY16.

·         Economies of scale and tax-break from the incremental revenue from sensors division will see net profit margin expanding to 22% in FY16 from 19% in FY15.

                            II.        Globetronics is a net USD exporter:

·         About 55-60% of its revenue is denoted in USD and while raw material purchases which account for ~60-65% of COGS act as a natural hedge, the remaining portions (ie. labour and utilities) are denoted in local currency. Our sensitivity analysis suggests that every 1% change in our base case exchange rate of USD1/MYR3.60, will vary our net profit forecasts for Globetronics by ~0.5-1%.

• Valuations. Tagging on a PER of 17x to Globetronics’ CY16 EPS of 40sen, we derive a target price of MYR6.80. Our target PER is a slight premium (17x CY16 PER) to our target PER multiple for Inari Amertron (16x CY16 PER) for stronger growth and balance sheet.

Against the other prominent local semiconductor peers, MPI and Unisem, our 17x target PER multiple is 40% premium to an average 12x CY16, to reflect Globetronics’ consistent and stronger earnings growth, superior ROE and dividend yields, and impeccable profitability track record.

• Why do we like this counter? We like Globetronics for its (i) impeccable profit track record, (ii) strong ability in securing new customers/products outsourcing contracts and (iii) positive exposure to the stronger USD/MYR forex.

Near-term catalysts not factored into our earnings forecasts include (i) contribution from ventures into healthcare-related sensors with the existing/new customers in 2016, (ii) potential award from new customers or for new products outsourcing. With 18% upside to our TP and supported by 4+% yields, we initiate Globetronics with a BUY.