Salutica Bhd
(Nov 1, 97.5 sen)
Maintain buy with a higher fair value (FV) of RM1.06: Salutica Bhd said customer A recently released the third generation of true wireless earbuds equipped with an upgraded Bluetooth chipset (developed by Salutica, in collaboration with a Netherlands company) was rated 4.7 stars out of five stars on American multinational corporation electronics retailer Best Buy’s website, with reports of better audio quality and long battery life.

 
It also has a comfortable and lightweight fit and 30% smaller in size compared with its previous model. Salutica is running at near peak production capacity, prompted by customer A doubling its forecasts for the product.

Furthermore, the group said it has two more true wireless headsets in the pipeline that will adopt the new Bluetooth chipset that is currently used in the aforementioned product.

For customer A, which Salutica has secured jobs to produce four models of computer mouse, the first model commenced production in July while the remaining models had also begun mass production as at our meeting in late October.

The production of mouses will help stabilise fluctuations in sales during off-season dips of headset production in the third quarter (3Q) and 4Q. We have already included these in our forecasts, estimating sales from computer mouses to be around 50% of group revenue for financial year 2020 forecast (FY20F) while headsets contribute 45%.

Salutica is trading at a discounted one-year forward price-earnings ratio (PER) of 12 times, versus our target PER of 14 times. We continue to like Salutica’s exposure to the growing true wireless stereo (TWS) market.

We are positive about the uptake of TWS earphones sparked by the removal of headphone jacks in smartphones. This trend has been trickling down from flagship smartphones to mid-end smartphones, where mid-end smartphones contribute a larger chunk of the total smartphone market.

We reiterate our “buy” recommendation on Salutica with a higher FV of RM1.06 per share (previously 61 sen per share) pegged at a rolled-forward FY21F PER of 14 times. We have increased our FY20 to FY22 earnings forecasts by 20% to 28% to account for higher order forecasts from customer A after visiting the group’s Ipoh plant recently. — AmInvestment Bank, Nov 1