Globetronics Technology (GTB MK; HOLD; TP: MYR4.05) – Looking better

Globetronics Technology (GTB MK; HOLD; TP: MYR4.05) – Looking better

• The worst is likely over; U/G to HOLD. Globetronics’ share price has rebounded 61% from its low (+27% YTD), on positive sentiment for its sensor division - strong revenue growth from potential supply of new sensors for 2017 premium smartphone launches. Nonetheless, sequential earnings up to 2Q/3Q17 should stay suppressed on weak volumes for the existing sensors and high depreciation from capex for the new sensors. Valuations are fair (15x CY18 EPS) post our earnings adjustments (-9%/+33% for FY17/18). Our new TP is MYR4.05 as we roll forward valuations to CY18 on unchanged 14x PER peg.
• Better days ahead … The completion of ams AG (AMS SW, Not-rated) takeover of Globetronics’ sensor customer revealed substantial revenue expectation for the acquired entity at USD300m in 2017 vs USD90m previously based on a 12-month run-rate. This is underpinned by USD250m in capex in 2016/17. Correspondingly, we expect Globetronics to benefit too, as it remains the key OSAT player for the supply of new sensors. Incorporating this potential (new sensors alongside the necessary capex), we cut FY17 net profit forecast by 9% (hit by depreciation charges from the new capex) but raise FY18 net profit by 33% (full-year contribution from the new sensors).

• … but is consensus too bullish? Key variance between our revised earnings forecasts and consensus lies in the assumption for the gesture sensors whereby the market expects the end-customer’s premium wireless earphones to be bundled into most, if not all variants of the next generation smartphone, to be launched in Sep 2017; we expect only the high-end variant to be bundled with the wireless earphones. Also, we expect depreciation to be higher (~MYR39m p.a.) in FY17/18, having incorporated the necessary capex (e.MYR105m total in FY17/18) for the new sensors.