Globetronics Technology (GTB MK; SELL; TP: MYR2.65) – Still cloudy visibility

Globetronics Technology (GTB MK; SELL; TP: MYR2.65) – Still cloudy visibility

• 3Q16 within our expectations, below street’s. Despite weaker sequential revenue (-9% QoQ), mainly from sensor and LED segments, earnings improved 40% QoQ on better cost controls. We keep our forecasts, expecting earnings to weaken on seasonally slower activities in 4Q16. Positively, dividends were maintained.
• Opportunity or threat from industry consolidation? ams AG (AMS SW, Not Rated) recently announced its acquisition of Globetronics’ Swiss sensor client, a high-end optical packaging leader, in order to be a leader in optical sensing. While we expect minimal impact to Globetronics in the near-term from this development, we do not rule out the possibility of a review by the combined entity on their outsourcing partners over the longer term; offering further opportunities for Globetronics should it succeed in proving its capabilities. As development period of sensor products are lengthy in nature, rationalisation of outsourcing partners may only materialise for the future new sensor products beyond 2017/18.
• Steep valuations despite 116% EPS growth in 2017. Our earnings forecast assume 100m smartphones to adopt the 3D-imaging sensors in FY17, with shipment to pick-up in 2Q17. On that premise, we project a 116% jump in earnings but that would still bring Globetronics to a still-pricey valuation of 19x FY17 PER. Stronger-than-expected adoption could warrant a re-rating. Pending that, our SELL rating stays.