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Wednesday, August 15, 2018

Elsoft Research Bhd - A Laggard in ATE Space

Author: kiasutrader | Publish date: Wed, 15 Aug 2018, 09:38 AM

2Q18 results release is due this week, which could see record earnings judging from the strong order-book backlog, augmented by a better product mix. Despite a bright prospect in 2H18, it is trading at huge PER discounts of 50%/36% from its closest peer- VITROX, at 17.5x/16.1x for FY18E/FY19E. This is all against its 2-year CNP CAGR of 25% and 0.6x PEG. Furthermore, it also enjoys the highest margin among the ATE players. Maintain TB with a higher TP of RM3.40.

Potentially strongest 2Q18. The group’s 2Q18 result is due for release this week, which we believe will see record revenue judging from the strong order-book backlog of c.RM50m as of 1Q18 (vs. the range of c.RM20-29m over the past two years’ order-book). Additionally, 2Q18 products portfolio could see higher revenue contribution from better margin Smart Devices segment (in conjunction with the brand-new flagship smartphones launching in 2H18), which suggests stronger margin both QoQ and YoY. Assuming a core NP margin of 50% in 2Q18 (which was the average core NP margin during the quarters with lion’s share contribution from Smart Devices segment), we estimate 2Q18 core NP could be in the range of RM11m-13m (+36%-61% QoQ, +55%-83% YoY), on a conservative 50% recognition of order-book backlog in 1Q18. Altogether, 1H18 results could beat consensus’ FY18E at 54%-59% hit rate but within our last’s report numbers at 46%-49% released in Sept 2017.

2H18 riding high on repeat orders of new testers and strong spillover. We believe orders could be repeated for its new customised flash tester (Smart Devices segment) in 3Q18 in conjunction with the brand-new flagship smartphones launching. Recall that for FY16, the group’s Smart Devices segment has grown 92% YoY to 37% in terms of revenue share, just with the introduction of new flashing features into the same generation smartphone. Meanwhile, FY17 saw another jump of 10% in Smart Devices segment, with further contribution of 40% share amid the new smartphone model launching. We are expecting Smart Devices segment to contribute 45% of total revenue in FY18. For the Automotive segment, we understand from our meeting in May 2018, that the group is working on new Automotive headlamp tester which we believe will see commercialisation in 4Q18. Meanwhile, it is also working on the R&D of new test equipment for usage in autonomous driving that can also be applied to smart devices. Although no quantum was mentioned for this equipment and we believe that the contribution will only be seen in 4Q18 if any, we are POSITIVE on this as the group’s move into the forefront of technology could create lucrative earnings potential, which was proven previously with its state-of-art engineering capability.

Trading Buy with a higher TP of RM3.40 from RM3.05. We forecast FY18E/FY19E CNP of RM42.6m/RM46.4m, with key assumptions being 2-year revenue/CNP CAGR of 21%/25% to be driven by its highvalue speed-enhanced testers as well as the better product mix. We roll over our valuation base year to FY19, based on a targeted 20.0x FY19E PER, which is at a 20% discount (on smaller market cap and stock illiquidity) to its closest peer comparison, VITROX, which is trading at 25.2x FY19E PER. Note that in terms of PEG, our ascribed PER of 20.0x, which implies a 0.8x PEG (on 2-year CNP CAGR of 25%) is also broadly in line with VITROX’s 0.8x PEG (on 2-year CNP CAGR of 31%). There is also a 92% positive correlation for the past 3- years price movement of ELSOFT and VITROX where the forward PER discount is now at the highest at -41% (vs the average -11% discount over the past three years), which we think is unjustified. All in, with our forecast net DPS of 12.0 sen in FY19 (implying a yield of 4.4%), our TP of RM3.40 suggests a total upside of 29% from here.

Source: Kenanga Research - 15 Aug 2018

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