ELSOFT (0090) - Elsoft Research - Still Shining
We came away from a recent meeting with our POSITIVE conviction reaffirmed as we gather that the group’s 4Q16 and 2017 earnings prospects remain resilient. This will be further supported by new orders from ATE for Solar Cell players and possibly medical devices, on top of the existing lion’s share from Automotive and Smart Devices segments. A 1-for-2 bonus issuance is also an additional sweetener. Maintain TB with a higher rollover TP of RM2.46.
Decent YTD16 performance with positive spill-over into FY17. Note that the group recently announced its 3Q16 results with CNP of RM8.9m (+5% QoQ; +19% YoY), bringing 9M16 CNP to RM22.5m (+72%) which already made up 88% of our previous full-year earnings estimates. Positive deviations were due to better-than-expected orders from Smart devices coupled with higher-than-expected margins on the back of better product mixes. To our positive surprise, a second interim DPS of 3.0 sen was also declared, bringing YTD DPS of 6.0 sen vs. our full-year DPS assumption of 8.0 sen. Note that the group normally declares the highest DPS in the 4Q for each financial year.
Beyond this level, the growth will be further supported by the manufacturing of Automatic Test Equipment (ATE) for Solar Cell players and possibly medical devices, on top of the existing lion’s share contribution of Automotive and Smart Devices segments. While visibility is still up to three months as usual, the group’s 4Q order backlog is stronger at RM27m (vs. typical order backlog of RM20m RM23m), which should sustain its earnings momentum till end-1Q17.
Still healthy LEDs test and burn-in equipment demand from Automotive and Smart Devices. For the lion’s share revenue contributor- Automotive segment, (contributed 43% in 9M16), proliferation of Daytime Running Light (DRL) LEDs in the modern cars should continue to propel the demand of its test equipment and burn-in systems going forward. Management believes the momentum should continue next year amid the proliferation of DRL beyond higher class car models as well as the mandatory requirement of having DRL by the European Union in all new cars alongside with higher requirement for the efficiency for test equipment. Note that management’s view is also echoed by LED inside; that DRL in which the group’s test and burn-in systems specifically catered for, will experience compounded annual production growth value of 21% from 2014-2018. Meanwhile for its Smart Devices segment, we believe that the orders for its new customised LED test and burn-in systems should be higher this year in conjunction with the brand-new smartphone launching by one of the world’s leading smartphone vendors. Recall that for 9M16, the group’s Smart Devices segment has grown 31ppts YoY to 42% in terms of revenue share in 9M16 in conjunction with the introduction of new flashing features.
Trading Buy with a higher TP of RM2.46 (Ex-Bonus: RM1.64), from RM2.12. Post meeting, we revise our FY16E CNP upwards by 10% (to RM28.1m) to account for higher orders from Smartphone segments and better product mix. Meanwhile, we introduce FY17E CNP of RM32.1m with key earnings assumption being: (i) 5-10% growth assumptions from Smart Devices and Automotive segments, (ii) 1000 units embedded systems produced for medical equipment in FY17, and (iii) core NP margins assumption of 43%. Our TP of RM2.46 (Ex Bonus: RM1.64) is based on a 14.0x FY17E PER which is broadly in line with the industry average forward PER of its global peers. Coupled with our net dividend yield of 5.6% in FY17E (DPR assumption of 62%), our TP of RM2.46 suggests a total upside of 30% from here.
Source: Kenanga Research - 8 Dec 2016
ELSOFT (0090) - Elsoft Research - Still Shining
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