“Independent market researcher SMITH ZANDER International expects global shipment volumes to hit 4.9bn units by 2018, as the adoption of Bluetooth technology to enhance connectivity is to play a significant role in the IoT environment.”
Salutica is slated for listing on the Ace Market of Bursa Malaysia on 18 May. The exercise involves the issuance of 78m new shares and offer for sale of 23m shares at an IPO price of MYR0.80 /share. We value the firm at MYR1.18 (48% upside) based on our target 2017 P/E of 10x, ie in line with its peers . We are forecasting for an earnings CAGR of >40% for FY15-18, which translates into an appealing PEG of 0.24x.
Riding on Bluetooth growth. Bluetooth has become one of the most prevalent and pervasive wireless technologies available today. This is evident in the fast growing Bluetooth- enabled devices shipments, which jumped to 3bn units in 2014 from 1.8bn units in 2011 – a CAGR of 18.6%. Independent market researcher SMITH ZANDER International expects global shipment volumes to hit 4.9bn units by 2018. The adoption of Bluetooth technology to enhance connectivity will play a significant role in the Internet of Things (IoT) environment. We believe this could ultimately spur demand for Bluetooth related devices , which, in our view , could benefit Salutica in the long run.
New models to drive growth. In 2011 -2013, Salutica secured manufacturing contracts for the design and production of Bluetooth stereo handsets from Plantronics Inc and Jaybird LLC. Currently, Salutica has three existing surface mount technology (SMT) lines with maximum output of approximately 14m units pa. Post IPO, it is looking to procure a new line to increase SMT capacity by >32% to 18.5m pa. We believe the capacity expansion is intended to eye more outsourcing opportunities from Plantronics and Jaybird. Based on our findings, Jaybird is set to launch two new products called Freedom and X3 in 2Q16, while Plantronics is looking to launch 1-2 new models over the next 6-12 months. Ultimately, these new launches by its customers could spell more job opportunities for Salutica over the near to medium term.
Looking to bag a new product. On top of that, Salutica is currently in the midst of securing a contract to manufacture a USB-powered device that adds touchscreen functionality to non -touch laptop screens. Approximately MYR10m of the IPO proceeds are be utilis ed to purchase a new production line with an annual installed capacity of 3m devices dedicated for this new product. We expect the installation to take place in 4Q16, with mass production to commence by early-2017. Earnings accretion is likely to be felt come 2HFY17(Jun).
Our valuation estimate of MYR1.18 is pegged to a target 2017 P/E of 10x, which is in line with local peers VS Industry (VSI MK, BUY, TP : MYR1.68) and SKP Resources (SKP MK, NEUTRAL, TP: MYR1.42). This is further supported by a corroborative DCF valuation of MYR1.28 that implie s a 2017 P/E of 10.8x, ie close to our target P/E. Management is committed to a dividend policy of no less than 30% going forward. This offers decent dividend yields of 2.3 -5.3% for FY16F-18F.
Key risks include customers’ concentration risk (its three largest customers contributed close to 90% of its FY15 revenue), dependence on foreign labour (75% of its workforce), and susceptibility to forex fluctuations , given that its sales are predominantly in USD.