18 March 2015 All good things come at a price Trading at 19x our 2015E EPS, Globetronics stock is not cheap. But foreign and institutional shareholdings remain near their peaks. The market is likely rewarding Globetronics for its successful earnings record and solid yields. To foster steady earnings growth, Globetronics is rapidly expanding its sensor business, which we expect to grow by 45% yoy in 2015. By 2016, we expect the sensor business to account for 57% of revenue, up from 32% in 2014. We raise our 2016E EPS by 18% on optimism about the new sensor product, following mass production of wearable sensors in 2015. We forecast a 2014-17 EPS CAGR of 25% and raise our TP to RM6.28. Sensor business on track to achieve 45% yoy growth in 2015 We expect Globetronics’s sensor business to grow by 45% yoy in 2015 on robust demand for proximity sensors, rising contributions from wearable sensors and marginal contributions from imaging sensors. By 2016, we estimate that a significant portion, or 57% of group revenue, will be derived from this area (2014: 32%). The sensor business is lucrative, and as the products replace older products reaching end-of-life status, we expect Globetronics’s EBITDA margins to remain healthy at about 29% despite cost pressures. Raising 2016E EPS by 18% to account for imaging sensors We raise our 2016E EPS by 18% to account for the imaging sensors, which are expected to go into mass production in 2016. A multi-die component, the imaging sensor should be a larger contributor than the current proximity sensor, which contributed about RM110m in revenue in 2014. We nevertheless trim our 2015E EPS by 7% as we had anticipated some contribution from this new product. Despite this, we expect solid EPS growth of 23% YoY in 2015 before increasing to 49% YoY in 2016, driven predominantly by Globetronics’s expansion into the sensor business. Maintain BUY, raising target price to RM6.28 We continue to like Globetronics for its: 1) strong growth prospects (3-year forward CAGR estimate of 25%); 2) forward-looking management – which is driving the group into strategic business areas; and 3) expected strong 2015-17 dividend yields of 5-8%. Maintain BUY. We raise our 12-month target price to RM6.28 (from RM5.31), based on an unchanged 16x PE on our revised EPS. Key risks include a loss of major customers. Earnings & Valuation Summary FYE 31 Dec 2013 Revenue (RMm) 321.4 EBITDA (RMm) 95.5 Pretax profit (RMm) 62.5 Net profit (RMm) 52.6 EPS (sen) 18.8 PER (x) 26.0 Core net profit (RMm) 49.1 Core EPS (sen) 17.6 Core EPS growth (%) 29.5 Core PER (x) 27.9 Net DPS (sen) 17.0 Dividend Yield (%) 3.5 EV/EBITDA (x) 12.8 Chg in EPS (%) Affin/Consensus (x) 2014 355.0 105.4 76.2 64.4 22.9 21.4 59.9 21.3 21.2 23.0 22.0 4.5 11.6 Source: Company, Affin Hwang estimates 2015E 421.5 121.5 87.9 73.8 26.3 18.7 73.8 26.3 23.3 18.7 23.6 4.8 10.0 -7.0 1.0 2016E 563.9 168.7 131.2 110.2 39.2 12.5 110.2 39.2 49.4 12.5 35.3 7.2 7.3 +18.3 1.2 2017E 595.9 181.0 140.5 118.0 42.0 11.7 118.0 42.0 7.1 11.7 37.8 7.7 6.8 +16.0 1.2 Company Update Globetronics GTB MK Sector: Technology RM4.90 @ 17 Mar 2015 BUY (maintain) Upside 28% Price Target: RM6.28 Previous Target: RM5.31 Price Performance Absolute Rel to KLCI 1M 0.0% +2.9% 3M +20.0% +14.6% 12M +56.7% +55.4% Stock Data Issued shares (m) 281.0 Mkt cap (RMm)/(US$m) 1,377.1/372.5 Avg daily vol - 6mth (m) 0.7 52-wk range (RM) 3.14-5.07 Est free float 54% BV per share (RM) 1.04 P/BV (x) 4.71 Net cash/ (debt) (RMm) (4Q14) 153.9 ROE (2015E) 25.6% Derivatives Nil Shariah Compliant Yes Key Shareholders Ng Kweng Chong AIA 23.2% 4.3% Source: Affin Hwang, Bloomberg Kevin Low (603) 2143 2235 [email protected] Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd) Page 1 of 9 18 March 2015 Sensor business Dual lens offering possible in new leading smartphone by year-end According to recent press reports, a major smartphone manufacturer is scheduled to release an updated model later this year, after its successful model launch in 2014. The new model is expected to carry features including a dual lens camera and 3D pressure sensors. The dual lens camera would offer significant advantages, allowing for optical zoom (vs digital zoom) and superior performance in a low-light environment, enhancing picture quality. Pick-up in capex suggests product may be designed in Our interest in this new phone lies in the dual lens, specifically the development of the imaging sensor. We know that Globetronics has been working on a 3D imaging sensor for its Swiss customer, which in turn has been a key supplier to a leading smartphone manufacturer. We thus have a strong expectation that Globetronics would form part of the supply chain for this component, not for the launch this year but potentially for a future model in 2016. This also corresponds with the company’s higher allocated capex of RM45m for 2015 (2014: RM28m), of which RM30m is slated for the expansion of its sensor segment. This leads us to believe that Globetronics’s Swiss customer‘s imaging product has a strong likelihood of being designed into the 2016 model. Imaging sensor could contribute RM110m in revenue annually If we are right, 2016 could be a strong earnings year for Globetronics. In 2014, about 32% of Globetronics’s revenue (or RM114m) was derived from the assembly and testing of sensors (predominantly proximity sensors) that ultimately end up in a leading smartphone. Assuming a monthly production run rate of 15m units, we think that this new imaging sensor could also contribute annual revenue of at least RM110m. This could be a conservative figure as we understand that the imaging sensor will consist of a multi-die component as opposed to a twin-die for the current proximity sensor. Fig 1: Growing revenue contribution from sensor business Source: Globetronics, AffinHwang Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd) Page 2 of 9 18 March 2015 Main risk seems to be timing In short, we are upbeat on the new imaging sensor. If anything, we think the main concern will be one of timing, in that there could be a lag in the time it takes revenue to reach that scale, as turning full turnkey may not be immediate. This nevertheless means that profit margins could be even stronger once contributions from the imaging sensors commence. Included in roadmap for future proximity sensors… Meanwhile, the assembly of the proximity sensors (currently second-generation) remains robust and is hitting monthly production of 20m units (up from 15m units 6 months ago) due to shortages of the final product in the market place. This should actually aid Globetronics’s 1Q15 results due to be announced on 28 April. We also understand from management that Globetronics has been included in the roadmap for the next generation of proximity sensors. …building on healthy relationship with Swiss customer We think that this is a positive sign on 3 counts: 1) both Globe and its Swiss customer are building a strong relationship with the ultimate customer; 2) it would provide solid earnings visibility for Globetronics, as a higher proportion of the component heads towards full turnkey; and 3) it could create greater opportunities for Globetronics with its Swiss customer as, apart from sensors and imaging, the Swiss customer is also involved in light (including flash modules). Globetronics started with proximity sensors only in 2012. Catalyst for 2015 - motion and optic sensors for wearable devices Nearer term, Globetronics’s existing assembly of proximity sensors should be accompanied by a motion and optic sensor, which would be featured in a wearable device that is expected to be launched soon. Globetronics commenced mass production of these sensors in December 2014, and has reached capacity of 2.5m units/month. This is expected to be ramped up to 5.5m units soon (from its current 3.5m units/month), based on additional capex invested. There could be upside to this product if the wearable product is successful in the market place. Separately, Globetronics is also co-developing a bio and health sensor for a new US customer. Production is also expected to begin by 3Q15. Sensor business on track to achieving 45% yoy growth in 2015 All in all, we remain upbeat on Globetronics’s sensor business and estimate 45% yoy growth in revenue contribution in 2015, which would be underpinned by robust demand from proximity sensors, a rising contribution from wearable sensors and a marginal contribution from imaging sensors. By 2016, we estimate that a significant portion, or 57% of group revenue, will be derived from this area. We like how management targeted strong segment growth and thereafter moulded itself into a successful niche player in this space, more importantly making sensors a key pillar in Globetronics’s growth strategy. This is reminiscent of a similar strategy adopted by Globetronics when identifying its crystal timing device business 10 years ago. Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd) Page 3 of 9 18 March 2015 Crystal timing devices Timing devices business volume expected to grow in 2015 Globetronics’s crystal timing devices division has been producing nearly 150m units per month and remains one of the largest outsourced contractors for Epson, outside of Japan. Management expects to see a new program transferred over by 2Q15, which could raise monthly production units by 10m. But growth thereafter should moderate Nevertheless with a healthy level of volume production already outsourced to Globetronics, the strong growth prospects that the division has seen over the past few years may be limited going forward. Moreover, with the weak Yen, cost down pressure has intensified. Revenue and margins should remain intact On a more positive note, business for TCXOs (temperature compensated crystal oscillator), which are used in GPS modules, remains solid, with monthly production levels at 11m units or 90% utilisation. Despite ASP erosion, we are confident that Globetronics will not see sharp revenue erosion from its timing devices in 2015. We expect revenue to remain stable, aided by the new programme transfer. More importantly, with improved productivity and efficiency via increased automation and vision inspection systems, we think that margins will also be sustained. Fig 2: Crystal timing devices a major revenue growth engine since 2005 Source: Globetronics, AffinHwang Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd) Page 4 of 9 18 March 2015 LED and others LED business generally softer Globetronics’s third-largest revenue contributor, its LED segment, which is expected to account for 21% of group revenue in 2015, has also been experiencing some headwinds. Volume loadings in 2015 are expected to be generally softer due to intense competition in this space. Nevertheless, volume loadings from Cree should increase by some 60%, albeit from a low base, due to a programme transfer from China. On the whole, management remains cautious on this division and has no plans for capex. Older packages – SOIC and ceramic/cerdip Accounting for 8% of group revenue in 2014, this segment is expected to shrink to 5% of revenue in 2015, as more of these products reach their end-of-life. We, however, take this positively, as we expect it to aid expansion of Globetronics’s margins in the longer run as these older packages command below-average group margins. Earnings Outlook Higher allocated capex of RM45m in 2015 Globetronics expects capex to rise to RM45m in 2015 from RM28m in 2014. Out of this, RM30m would be dedicated to the expansion of its sensor business, predominantly for its imaging sensors. We nevertheless understand that this capex is only sufficient for a monthly capacity of 3m units. If production capacity were to hit 20m units per month (similar to monthly production volumes for its proximity sensors), further capex would be required in the future, suggesting that Globetronics may be in a capex upcycle over the next few quarters. We assume annual capex of RM50m over 2016-17. Fig 3: Strong positive free cash flow Source: Globetronics, AffinHwang Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd) Page 5 of 9 18 March 2015 Capex to be internally funded, no major dividend concerns We are not entirely concerned over the higher capex outlay expected over the next 3 years. The group has been conservatively managed and this is ingrained within the management team. With a healthy cash balance of RM156m (net cash of RM154m), capex could be internally funded without affecting dividend plans. Globetronics paid out 96% of its headline net profit as dividends in 2014. Fig 4: Healthy cash balance with minimal debt Source: Globetronics, AffinHwang Cutting 2015E EPS by 7%, but raising 2016E EPS by 18% Due to a timing difference in terms of Globetronics’s new products (imaging sensor) coming on-stream, with commercial production likely only in 2016, we are trimming our 2015E EPS by 7%, and transferring that volume production to 2016. We also take into account that the imaging sensor is a multi-die component and hence a larger project. We thus raise our 2016E EPS by 18%. Despite the 2015E earnings cut, we expect solid EPS growth of 23% yoy in 2015 before rising by 49% yoy in 2016E, driven predominantly by Globetronics’s expansion in the sensor business. Fig 5: 2014-17E EPS CAGR of 25% Source: Globetronics, AffinHwang Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd) Page 6 of 9 18 March 2015 Valuation and recommendation 2015E valuations not cheap, but 2016 looks more attractive At 19x our 2015E EPS, the stock is not cheap, trading at a premium to its semiconductor peers. Nevertheless, we have not seen any sharp paredown in institutional or foreign ownership. The latest available data indicate foreign ownership of 12% and local institutional holdings of 25%, near their historical peaks, suggesting that institutional funds are willing to pay a premium for the company’s excellent execution track record and solid dividend yields. We think that the market may also be pricing in stronger growth prospects in the sensor space. However, 2016E PE valuations decline sharply to 12.5x on our estimate, in tandem with the 49% yoy EPS growth we expect in 2016. Fig 6: Valuations reflective of a stronger entity Source: Globetronics, AffinHwang Maintain BUY, raising target price to RM6.28 We continue to like Globetronics for its: 1) solid growth prospects (3-year forward CAGR of 25%, on our estimates); 2) forward-looking management team – which has been able to drive the group into strategic business areas; and 3) strong 2015-17E dividend yields of 5-8%. We maintain our BUY call and raise our 12-month target price to RM6.28 (from RM5.31), based on an unchanged 16x PE on our revised EPS. Key risks include a loss of major customers. Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd) Page 7 of 9 18 March 2015 GLOBETRONICS – FINANCIAL SUMMARY Profit & Loss Statement FYE Dec (RMm) Total revenue Operating expenses EBITDA Depreciation Amortisation EBIT Net interest income/(expense) Associates' contribution Others Pretax profit Tax Minority interest Net profit Core net profit 2013 321 (226) 96 (38) 57 2 0 59 (10) 53 49 2014 355 (250) 105 (36) 69 2 0 72 (12) 64 60 Balance Sheet Statement FYE Dec (RMm) Fixed assets Other long term assets Total non-current assets Cash and equivalents Stocks Debtors Other current assets Total current assets Creditors Short term borrowings Other current liabilities Total current liabilities Long term borrowings Other long term liabilities Total long term liabilities 2013 87 23 110 147 14 68 229 53 5 5 64 0 0 2014 75 26 102 156 19 82 257 67 2 1 70 3 3 Shareholders' Funds 275 285 Cash Flow Statement FYE Dec (RMm) EBIT Depreciation & amortisation Working capital changes Cash tax paid Others Cashflow from operations 2013 57 38 1 (12) (1) 87 2014 69 36 (4) (17) (7) 82 2015E 85 36 7 (14) 115 2016E 129 40 (9) (21) 139 2017E 138 43 (2) (22) 157 Capex Disposal/(purchases) Others Cash flow from investing (15) 3 (11) (28) 7 (21) (45) 2 (43) (50) 3 (47) (50) 3 (47) Debt raised/(repaid) Equity raised/(repaid) Net inct income/(expense) Dividends paid Others Cash flow from financing 5 7 2 (47) (2) (35) (3) 4 2 (62) 6 (52) - - - 2 (66) (2) (66) 2 (99) (3) (99) 2 (106) (3) (106) 41 72 8 54 6 70 (8) 89 3 107 Net change in CF Free Cash Flow 2015E 421 (300) 122 (36) 85 2 0 88 (14) 74 74 2016E 564 (395) 169 (40) 129 2 0 131 (21) 110 110 2017E 596 (415) 181 (43) 138 2 0 141 (22) 118 118 2015E 84 26 110 161 21 81 263 75 2 1 78 3 3 2016E 94 26 120 154 28 108 289 100 2 1 103 3 3 2017E 101 26 127 156 29 114 300 106 2 1 109 3 3 292 303 315 Key Financial Ratios and Margins FYE Dec (RMm) 2013 Growth Revenue (%) 10.8 EBITDA (%) 5.5 Core net profit (%) 32.8 2014 2015E 2016E 10.5 10.4 21.9 18.7 15.3 23.3 33.8 38.8 49.4 5.7 7.3 7.1 Profitability EBITDA margin (%) PBT margin (%) Net profit margin (%) Effective tax rate (%) ROA (%) Core ROE (%) ROCE (%) Dividend payout ratio (%) 29.7 19.5 16.4 15.9 15.5 18.3 21.1 90.2 29.7 21.5 18.1 15.5 18.0 21.4 24.4 96.0 28.8 20.8 17.5 16.0 19.8 25.6 29.4 90.0 29.9 23.3 19.5 16.0 26.9 37.1 43.0 90.0 30.4 23.6 19.8 16.0 27.6 38.2 44.4 90.0 Liquidity Current ratio (x) Op. cash flow (RMm) Free cashflow (RMm) FCF/share (sen) 3.6 86.8 72.3 25.9 3.7 81.6 53.5 19.0 3.4 114.6 69.6 24.8 2.8 138.9 88.9 31.6 2.8 156.7 106.7 38.0 Asset management Debtors turnover (days) Stock turnover (days) Creditors turnover (days) 77.1 16.0 60.6 84.0 19.6 69.2 70.0 18.0 65.0 70.0 18.0 65.0 70.0 18.0 65.0 (51.6) nm (54.1) nm (54.7) nm (50.1) nm (49.1) nm 4Q13 78 -55 24 -9 14 1 0 0 15 -2 1Q14 83 -57 26 -10 17 0 0 0 17 -3 2Q14 91 -62 28 -10 19 1 0 1 21 -3 3Q14 91 -63 28 -8 20 1 0 1 22 -4 4Q14 90 -68 22 -9 14 1 0 2 17 -1 13 13 14 14 17 16 18 16 15 13 30.1 19.2 16.7 31.7 20.4 16.9 31.4 22.9 19.1 30.7 24.0 19.4 24.7 18.4 17.0 Capital structure Net Gearing (%) Interest Cover (x) Quarterly Profit & Loss FYE 31 Dec (RMm) Revenue Operating expenses EBITDA Depreciation EBIT Net int income/(expense) Associates' contribution Exceptional Items Pretax profit Tax Minority interest Net profit Core net profit Margins (%) EBITDA PBT Net profit 2017E Source: AffinHwang Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd) Page 8 of 9 18 March 2015 Equity Rating Structure and Definitions BUY Total return is expected to exceed +10% over a 12-month period HOLD Total return is expected to be between -5% and +10% over a 12-month period SELL Total return is expected to be below -5% over a 12-month period NOT RATED Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a recommendation The total expected return is defined as the percentage upside/downside to our target price plus the net dividend yield over the next 12 months. OVERWEIGHT Industry, as defined by the analyst’s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months NEUTRAL Industry, as defined by the analyst’s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months UNDERWEIGHT Industry, as defined by the analyst’s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (14389-U) (formerly known as HwangDBS Investment Bank Berhad) (“the Company”) based on sources believed to be reliable. However, such sources have not been independently verified by the Company, and as such the Company does not give any guarantee, representation or warranty (express or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or rendered in this report. Facts, information, views and/or opinion presented in this report have not been reviewed by, may not reflect information known to, and may present a differing view expressed by other business units within the Company, including investment banking personnel. Reports issued by the Company, are prepared in accordance with the Company’s policies for managing conflicts of interest arising as a result of publication and distribution of investment research reports. Under no circumstances shall the Company, its associates and/or any person related to it be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Any opinions or estimates in this report are that of the Company, as of this date and subject to change without prior notice. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any securities. The Company and/or any of its directors and/or employees may have an interest in the securities mentioned therein. The Company may also make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences and hence an independent evaluation is essential. Investors are advised to independently evaluate particular investments and strategies and to seek independent financial, legal and other advice on the information and/or opinion contained in this report before investing or participating in any of the securities or investment strategies or transactions discussed in this report. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Company’s research, or any portion thereof may not be reprinted, sold or redistributed without the consent of the Company. The Company, is a participant of the Capital Market Development Fund-Bursa Research Scheme, and will receive compensation for the participation. This report is printed and published by: Affin Hwang Investment Bank Berhad (14389-U) (formerly known as HwangDBS Investment Bank Berhad) A Participating Organisation of Bursa Malaysia Securities Bhd Chulan Tower Branch, 3rd Floor, Chulan Tower, No 3, Jalan Conlay, 50450 Kuala Lumpur. www.affinhwang.com Email : [email protected] Tel : + 603 2143 8668 Fax : + 603 2145 3005 Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd) Page 9 of 9
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