Affin Hwang Investment Bank 20150318

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
kevin.low@affinhwang.com
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
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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
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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 : research@affinhwang.com
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