Salutica Bhd
(Feb 25, 76.5 sen)
Downgrade to underweight with a lower fair value (FV) of 58 sen: We downgrade our recommendation on Salutica Bhd to “underweight” from “buy” with a lower FV of 58 sen (previously 95 sen per share), pegged at a forecasted financial year ending June 30, 2021 (FY21F) price-earnings ratio of 14 times.

We slash our FY20 earnings forecasts and now project a loss for the year due to a poor set of results and in anticipation of an even weaker remainder of FY20 as the third quarter (3Q) and 4Q are seasonally weaker quarters for Salutica due to off-season dips in headphone production. We also cut our FY21–FY22 forecasts by 28%–39% as we adjust for a slower-than-expected pickup in headset production and lower mouse production estimates.

Year-on-year (y-o-y), Salutica recorded a RM800,000 core loss for 2QFY20, bringing its first half of FY20 (1HFY20) core loss to RM3.5 million, after stripping off net gains amounting to RM1.2 million mainly from FV gains on short-term investments and claims made for obsolete materials. The results dashed our expectations of achieving our FY20 profit forecast of RM15.8 million.

Salutica’s 1HFY20 earnings were in the red due to a change in its sales mix as the contribution of Bluetooth headsets was lower than that of mouse products, though headsets were still the main revenue contributor to the group.

Group revenue fell 16% y-o-y on the back of lower sales volume of its current products that were reaching the end of their product life cycles and a slower-than-expected revenue recognition of new-generation wireless headsets that commenced production in August 2019. Sales of products in its top three markets — America, Asia ex-Malaysia and Europe — dropped by 10%, 43% and 7% y-o-y respectively.

In light of the recent Covid-19 outbreak, Salutica said it had experienced supply chain constraints, although the extent of the impact was not disclosed. However, we believe that the supply chain shocks are a temporary disruption and thus do not yet guide for further earnings decline.

On a more positive note, Salutica has also shared that its plan to co-develop hearables with a Netherlands design partner is running according to plan, foreseeing that two of its current product development projects will reach mass production by 4QFY20. We have not factored in any earnings contribution from these projects yet.

We believe that the group is still undergoing a gestation period, projecting that the group will return to the black only in FY21 but noting its strategy to address the hearable market in the longer term. — AmInvestment Bank, Feb 25