Sensor segment drives future growth for Globetronics

by **Cals** Fri 08 Nov 2013, 13:40

Business & Markets 2013

Written by MIDF Research

Friday, 08 November 2013 10:59

Globetronics Technology Bhd
(Nov 7, RM3.09)
Maintain buy at revised target price of RM4.19 (from RM2.96): Once the main segment of the company’s top line, the role of integrated circuit (IC) has been reduced to a supplementary one. Globetronics’ move to shift away from the IC segment is timely given its erratic demand.

Demand for proximity sensors and optical interface sensors will chart the company’s growth moving forward. In addition, management also guided that 90% of the reserach and development department’s effort is being channelled toward the development of new sensor components such as the multi-port proximity sensors.

The company expects to spend up to RM40 million in the first half of 2014 (1H14) alone, mainly to fund: (i) expansion; and (ii) new product development. This is double the estimated capital expenditure (capex) for 2013 of about RM22 million. For 2014, we forecast capex spending to reach RM50 million.

In view of the heavy capex spending, the company hinted that the quantum of dividend for next year may be capped at 2013 level. Nonetheless, at the current price, dividend yield remains attractive at above 6%, based on our estimate.

We are revising upward our earnings estimate for 2014 by 8.7% to RM65 million as we are more bullish on the demand for the sensor product segment. By 2015, we expect earnings to hit RM77.5 million with the sensor segment making up 50% of the company’s revenue.

Globetronics is undergoing a major product transition. At this juncture, it is difficult to attach a fair one-year forward multiple to a longer term growth story. Nonetheless, at the current price level, the company still offers an attractive dividend policy and yield.

Thus, we are switching our valuation methodology to dividend discount model (DDM) from price-earnings ratio previously. At this juncture, we believe DDM would be more suited to appraise the fair value of Globetronics. Based on weighted average cost of capital of 11.5%, we arrived at a new target price of RM4.19 (previously RM2.96).

We continue to remain upbeat on the prospects of the company. Coupled with attractive yield of about 6%, we believe the its strategy of pursuing a niche segment in the technology industry is bearing fruit.

The sensor segment has recorded impressive top line growth. This is in line with our positive industry sector view that the demand for tablets and smartphones remains strong.

In addition, with its proprietary technology, we believe Globetronics will benefit from the “wearable” product segment once it gains market traction. — MIDF Research, Nov 7

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This article first appeared in The Edge Financial Daily, on November 8, 2013.