Technology

5 June 2013
KDN: PP 10251/07/2013/(032736)

Company Update

Capitalising on all its right moves

FY13 EPS growth to exceed 41%, upping our FY14-15 forecast We raise our FY13-15 EPS by 11%-25% to account for the improved loadings from EPSON, both for its timing devices and for its temperature compensation frequency device as well as pickup in its LED division, led by new 2 new customers. Our forecasts also take into account the approval of a MIDA/MITI Direct Domestic Investment grant relating to its proximity sensor product. We estimate that this should contribute an additional c. RM5m-RM6m/year to Globes bottomline over FY13-FY15. We suspect that there could be an element of upside surprise to our DPS forecast as well. Balance sheet remains strong with a cash position of RM109m as at end 1Q13 with no debt, and would be further enhanced by the grant income. However, even at current levels, FY14 DPS yield is attractive at 9%. Steady roadmap ahead for 2H13 and 2014 Globes relationship with its Swiss customer seems to be blossoming and should see enhanced revenue and earnings contribution not merely from its proximity sensor product but also from a new optical lense product by 3Q13. We believe this will be used in the camera flash component for smartphones. Unlike those in the market presently, we understand that this new optical lense will be differentiated and potentially targeted at high-end smartphones. Beyond this, Globe is also awaiting qualification by a US customer for a multi-port proximity sensor. This product will enable gesture recognition and if successful, could further be a positive earnings catalyst as we understand that the application for this product will go beyond the smartphone and tablet markets and into the consumer electronics segment. Maintain BUY, TP raised to RM2.83 We are raising our TP to RM2.83 after rolling forward our valuation horizon to FY14 and accounting for our earnings upgrade. Our PER basis of 12x CY14 EPS remains unchanged although looks really attractive given Globes strong FY12FY15 EPS CAGR of 28% and dividend yields of 9%, and after having taken into account the KLCIs more expensive multiple of 16x. With improving earnings visibility and increasing exposure to the rapidly expanding smartphone and tablet markets, we believe that it is only a matter of time before the market accords Globe a PER multiple re-rating. At the same time, we believe there is also room for positive earnings surprise particularly post the expiry of its exclusive period for its proximity sensors in July 2013. Globe is also at the drawing board for the replacement model of its initial proximity sensor.

Globetronics
GTB MK

RM2.15 BUY (maintain) Price Target: RM2.83 ()

2.30 2.10 1.90 1.70 1.50 1.30 1.10 0.90 0.70 0.50 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 May-13
RM

Price Performance
1M 3M Absolute +18.8% +20.1% Rel to KLCI +13.3% +11.0% 12M +94.6% +70.9%

Stock Data
Issued shares (m) 272.2 Mkt cap (RMm) 585.4 Avg daily vol 6 mth (m) 1.09 52-wk range (RM) 1.09-2.22 Est free float 54% NTA per share (RM) 0.98 P/NTA (x) 2.19 Net cash/ (debt) (RMm) (1Q13) 109.7 ROE (2013F) 18.1% Derivatives Nil

Key Shareholders
Ng Kweng Chong 24.6%

Earnings & Valuation Revisions

13E Prev EPS (sen) 17.6 Curr EPS (sen) 19.2 Chg (%) +10.5 Prev target price (RM) Curr target price (RM) 14E 19.0 23.6 +25.4 15E 22.5 27.9 +25.3 2.11 2.83

Kevin Low (603) 2143 2235 kevin@affininvestmentbank.com.my

Earnings & Valuation Summary FYE Dec (RMm) 2011 Revenue 265.0 EBITDA 68.3 Pretax profit 30.2 Net profit 26.7 EPS (sen) 9.7 PER (x) 22.2 Core net profit 26.6 Core EPS (sen) 9.7 Core EPS chg (%) (0.6) Core PER (x) 22.3 DPS (sen) 8.5 Dividend Yield (%) 4.0 EV/EBITDA (x) 7.3 Consensus profit Affin/Consensus (x) -

2012 290.0 90.0 48.3 41.3 15.2 14.2 37.0 13.6 40.6 15.8 11.0 5.1 5.3 -

2013E 379.1 110.7 65.4 53.0 19.2 11.2 53.0 19.2 41.7 11.2 16.4 7.6 4.1 -

2014E 461.2 124.9 80.1 64.8 23.6 9.1 64.8 23.6 22.5 9.1 20.0 9.3 3.6 -

2015E 517.9 132.4 94.8 76.8 27.9 7.7 76.8 27.9 18.4 7.7 23.7 11.0 3.3 -

Important disclosures at end of report

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Temperature compensation device now build into Korean smartphone Globes temperature compensation frequency device (TCFD), which was previously only used by a leading tablet manufacturer, has now been built into a popular Korean smartphone model. We are upbeat on this development as volume loadings for TCFD has exponentially risen from 4m units per month in January 2013 to 8m units in May. From an operational perspective, the diversification of its customer base would also reduce its risk to a single major customer and potentially further enhancing its future customer base. We understand that volumes will hit >9m units per month in July in tandem with the strong demand from this new Korean smartphone. With demand at this current run rate, we now expect contribution from TCFD to account for 8% of FY13 revenue from 2% of FY12 group revenue, and rising to 12% in FY14. MIDA and MITI to provide grant for leading edge proximity sensor Recall that in April 2012, Globe commenced maiden production of proximity sensors for a Swiss customer, which was eventually built into a leading smartphone. Both MITI and MIDA were impressed by the technological accomplishments made by Globe, and in turn recently rewarded Globe with a Direct Domestic Investment grant equivalent to the tune of a one-for-one grant. This applies to Globes capex investment into these proximity sensors for a value of RM39m over FY12-14. So far, Globe has already invested RM29m in this product. We understand that from a cash flow perspective, Globe would receive the full sum of c. RM14.5m, with expected disbursement in 4Q13. This grant would however be amortized over a period of 3 years as it matches its grant income against depreciation from invested equipment. We thus estimate that Globe could potentially book in up to RM7m in other income for FY13 or an equivalent of 2.5 sen/share. In our view, and given Globes track record in returning excess cash, we believe that there could be an upside bias to our FY13-15 DPS forecast. In addition to this Globe has also been accorded an R&D training grant for the same product to the tune of RM4.2m over a period of 5 years. Existing orders strong, new business stream to add flavour Meanwhile orderflow for its bread and butter business continues to do well. We understand that volumes for its timing devices for EPSON will breach 120m units per month while Osram will see a +20% increase in loadings over FY12. On the other hand, Globe will see maiden revenue and earnings contribution from new LED customers. One product involves LED components for a major smartphone manufacturer while another is for the agricultural industry relating to lighting for vertical farming. We believe that revenue from this new stream could amount to c. RM20m for FY13 although we understand that margins are more lucrative than that of its existing business. Forecast raised, room for DPS upside We raise our FY13-15 EPS by 11%-25% to account for the improved loadings from EPSON, both for its timing devices as well as for its TCFDs as well as pickup in its LED division. Our forecast also takes into account the grant income to be received with respect to the proximity sensors. We suspect that there could be an element of upside surprise to our DPS forecast as well. Balance sheet remains strong with a cash position of RM109m as at end 1Q13 with no debt, and would be further enhanced by the grant income. However, even at current levels, FY14 DPS yield is attractive at 9%.

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Steady roadmap ahead for 2H13 and 2014 Leading up to its improved ties with its Swiss customer, Globe will commence another project with this customer relating to an optical lense used in the camera flash for smartphones by 3Q13. We believe this will be a differentiated niche product, potentially targeting high-end smartphones as there are already a myriad of suppliers for optical lenses in the market currently. Beyond this, Globe is also awaiting qualification by a US customer for a multi-port proximity sensor. This product will enable gesture recognition and if successful, could further be a positive earnings catalyst as we understand that the application for this product will go beyond the smartphone and tablet markets and into the consumer electronics segment. Maintain BUY, TP raised to RM2.83 We are raising our TP to RM2.83 after rolling forward our valuation horizon to FY14 and accounting for our earnings upgrade. Our PE basis of 12x CY14 EPS remains unchanged although looks really attractive given Globes strong FY12FY15 EPS CAGR of 28% and dividend yields of 9%, and after having taken into account the KLCIs more expensive multiple of 16x. With improving earnings visibility and increasing exposure to the rapidly expanding smartphone and tablet markets, we believe that it is only a matter of time before the market accords Globe a PER multiple re-rating. At the same time, we believe there is also room for positive earnings surprise particularly post the expiry of its exclusive period for its proximity sensors in July 2013.

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Focus Charts
Fig 1: 1Q13 revenue breakdown
Q uartz C rys tal/T im ing dev ice s S O IC pac kages S e nsors LE D /W afer s eparation/S orting C eram ic /C E R D IP pac kages O thers

Fig 2: Revenue for key divisions

RMm 140 120 Quartz Crystal / Timing Devices LEDs Sensors

1% 23 %

100 80
39%

60
7%

40
7%

20
2 3%

2005 2006 2007 2008 2009 2010 2011 2012 2013F

Source: Company data, Affin

Source: Company data, Affin

Fig 3: EBITDA margins holding up well

(RMm) 35 30 25 20 20% 15 15% 10 5 0 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13
Source: Affin, Globe

Fig 4: Dividend yields still appealing

(%) 40% 35% 30%
10.0% (%) 16.0% 14.0% 12.0%

EBITDA (LHS)

Ebitda margin (%) (RHS)

25%
8.0% 6.0% 4.0% 2.0% 0.0% Jan-07
Source: Affin

10% 5% 0%

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Fig 5: PE multiples compelling at ~9x

(x) 13 12 +1 SD 11 10 9 8 7 6 5 4 -1 SD
PE Avg PE +1SD -1SD

Fig 6: P/B valuations at 2.1x

(x) 2.2
P/B Avg P/B +1SD -1SD

2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4

-1 SD +1 SD

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Source: Affin

Source: Affin

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Jan-13

Jul-06

Jul-07

Jul-08

Jul-09

Jul-10

Jul-11

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jul-12

Jul-06

Jul-07

Jul-08

Jul-09

Jul-10

Jul-11

Jul-12

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 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 Shareholders' Funds Cash Flow Statement FYE Dec (RMm) EBIT Depreciation & amortisation Working capital changes Cash tax paid Others Cashflow from operations Capex Disposal/(purchases) Others Cash flow from investing Debt raised/(repaid) Equity raised/(repaid) Net inct income/(expense) Dividends paid Others Cash flow from financing Free Cash Flow
Source: Affin Investment Bank

2011 265 (197) 68 (40) 29 1 0 30 (4) 27

2012 290 (200) 90 (48) 42 2 0 44 (7) 37

2013E 379 (268) 111 (48) 63 2 0 65 (12) 53

2014E 461 (336) 125 (48) 77 3 0 80 (15) 65

2015E 518 (386) 132 (41) 92 3 0 95 (18) 77

Key Financial Ratios and Margins FYE Dec (RMm) 2011 Growth Revenue (%) EBITDA (%) Core net profit (%) Profitability EBITDA margin (%) PBT margin (%) Net profit margin (%) Effective tax rate (%) ROA (%) Core ROE (%) ROCE (%) Dividend payout ratio (%) Liquidity Current ratio (x) Op. cash flow (RMm) Free cashflow (RMm) FCF/share (sen) Asset management Debtors turnover (days) Stock turnover (days) Creditors turnover (days) Capital structure Net Gearing (%) Interest Cover (x) (5.1) (4.9) (0.6)

2012 9.4 31.6 39.1

2013E 30.7 23.1 43.3

2014E 21.7 12.8 22.5

2015E 12.3 6.0 18.4

25.8 11.4 10.1 11.8 8.9 10.9 11.5 85.2

31.0 16.7 14.3 14.5 12.7 14.6 16.3 72.4

29.2 17.2 14.0 19.0 16.0 19.9 23.7 85.0

27.1 17.4 14.1 19.0 18.5 23.5 28.0 85.0

25.6 18.3 14.8 19.0 20.8 26.8 32.1 85.0

2011 127 20 147 99 12 40 151 38 4 4 47 5 5 246

2012 111 20 131 106 18 69 2 195 58 5 64 1 1 261

2013E 103 20 123 134 19 54 2 208 54 5 59 1 1 271

2014E 96 20 115 147 23 63 2 235 63 5 68 1 1 280

2015E 95 20 114 157 26 71 2 255 71 5 76 1 1 292

3.3 70 55 20

3.1 61 23 8

3.5 109 69 25

3.4 106 66 24

3.3 112 72 26

55 17 53

87 22 73

52 18 52

50 18 50

50 18 50

(38.6) 711.9

(40.6) nm

(49.4) nm

(52.5) nm

(53.6) nm

2011 29 40 3 (2) 1 70 (16) 20 4 1 1 1 (23) (5) (25) 74

2012 42 48 (16) (12) (5) 61 (38) 12 (26) 3 3 2 (30) (8) (29) 35

2013E 63 48 10 (12) (0) 109 (40) 2 (38) 1 2 (45) (2) (44) 71

2014E 77 48 (4) (15) 106 (40) 3 (37) 3 (55) (3) (55) 69

2015E 92 41 (3) (18) 112 (40) 3 (37) 3 (65) (3) (65) 75

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

1Q12 57 (41) 16 (9) 7 0 (0) 0 7 (1) 6 6

2Q12 70 (48) 21 (10) 11 1 0 1 12 (2) 10 9

3Q12 78 (49) 29 (16) 13 1 0 4 18 (4) 14 10

4Q12 85 (62) 24 (13) 11 1 0 (0) 11 0 11 12

1Q13 77 (55) 23 (12) 11 1 0 1 12 (2) 10 9

28.3 13.0 10.9

30.4 17.4 14.0

37.3 22.9 18.1

27.6 12.8 13.2

29.2 15.9 13.2

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Equity Rating Structure and Definitions BUY Total return is expected to exceed +15% over a 12-month period TRADING BUY Total return is expected to exceed +15% over a 3-month period due to short-term positive development, but fundamentals are (TR BUY) not strong enough to warrant a Buy call. This is to cater to investors who are willing to take on higher risks ADD RE DUCE TRADING SELL (TR SELL) SELL NOT RATED Total return is expected to be between 0% to +15% over a 12-month period Total return is expected to be between 0% to -15% over a 12-month period Total return is expected to exceed -15% over a 3-month period due to short-term negative development, but fundamentals are strong enough to avoid a Sell call. This is to cater to investors who are willing to take on higher risks Total return is expected to be below -15% over a 12-month period Affin Investment Bank does not provide research coverage or rating for this company. Report is intended as information only and not as a recommendation

OVERWEIGHT Industry, as defined by the analysts coverage universe, is expected to outperform the KLCI benchmark over the next 12 months NEUTRAL Industry, as defined by the analysts coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months UNDERWEIGHT Industry, as defined by the analysts 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 Investment Bank Berhad (Affin Investment Bank) based on sources believed to be reliable. However, such sources have not been independently verified by Affin Investment Bank, and as such, Affin Investment Bank 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 opinions 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 Affin Investment Bank, including investment banking personnel. Reports issued by Affin Investment Bank are prepared in accordance with Affin Investment Banks policies for managing conflicts of interest arising as a result of publication and distribution of investment research reports. Under no circumstances shall Affin Investment Bank, its affiliates and related companies, their directors, associates, connected parties and/or employees 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 Affin Investment Bank 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. Affin Investment Bank and/or any of its directors and/or employees may have an interest in the securities mentioned therein. Affin Investment Bank may also make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. Further, Affin Investment Bank, its affiliates and its related companies may do and seek to do business with the company(ies) covered in this research report and may from time to time assume an underwriting commitment in securities of such company(ies), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform significant investment banking, advisory or underwriting services for or relating to such company(ies) as well as solicit such investment, advisory or other services from any entities mentioned 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. In addition, this report is general in nature and it is intended for circulation for Affin Investment Bank and its affiliates clients generally and does not have regard to the specific investment objectives, financial situations and the particular needs of any specific person who may receive this report. 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. Simulations or model portfolio are prepared on a hypothetical basis and are for illustrations only. 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. Affin Investment Banks research, or any portion thereof may not be reprinted, transmitted to, photocopied or reproduced in any form - sold or redistributed, directly or indirectly in whole or in part without the prior written express consent of Affin Investment Bank.

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