Salutica Bhd
(Feb 26, 37 sen)
Downgrade to hold with a lower fair value (FV) of 36 sen: We downgrade Salutica Bhd to “hold” from “buy” with a lower FV of 36 sen per share (previously 63 sen per share). We cut our financial year 2019 (FY19)–FY21 forecast net profit by 41%–43% to account for a longer-than-expected product development phase and the growing competition in the Bluetooth headset space. Our FV is pegged at an unchanged calendar year 2019 forecast price-earnings ratio of 15 times.

Salutica’s core net profit for first half of FY19 (1HFY19) of RM3.3 million (-72.6% year-on-year [y-o-y]) came in below expectations, accounting for 25% of our full-year forecast and 23% of consensus full-year estimate. Revenue came in at RM103.6 million, representing a 40% y-o-y drop from RM171.4 million in 1HFY18.

For second quarter of FY19, the company recorded a core net profit of RM900,000 (-84% y-o-y, -60% quarter-on-quarter [q-o-q]). Revenue for the quarter fell 46.5% y-o-y and 17.4% q-o-q, owing to a longer-than-expected product development cycle for the latest-generation Bluetooth headset for a key customer. The delay was necessary as the company was incorporating a new technology which requires more stringent field test before approval for mass production. This model will replace the previous model, which was launched in August 2017.

We are also cautious about Salutica’s reliance on its key customer given the intense competition in the Bluetooth headset space. With new launches of smartphones abandoning the headphone jack, smartphone manufacturers are also capitalising on this trend by introducing their own proprietary Bluetooth headsets, which may eat into Salutica’s market share.

On a positive note, Salutica has secured two new customers in the wearable and headset segments. The wearable item will be a device embedded in the shoe insole for analysing running speed and patterns, while the headset product is a hearing aid.

The insole device will likely be geared towards athletes who consistently track their running activities, providing a more comprehensive analysis than a typical health bracelet does. Currently, the group is in the product development and prototyping stage, and expects a commercial launch within this year.

All in all, while we are positive about the accelerated uptake of wireless Bluetooth earphones sparked by the removal of headphone jack in smartphones and the availability of near-field communication technology. However, we remain cautious due to the intensifying competition in the space. — AmInvestment Bank, Feb 26