FIT announced FY20E profit warning with earnings decline of 50%+ YoY, which is 27%/26% below our/consensus estimates, mainly due to COVID-19 impact, fair value changes and higher income tax expense in 4Q20E. With 40% sales exposure to Apple, FIT’s 4Q20 NP of 38% YoY decline was a result of removal of in-box headphones in iPhone 12 (US$200mn in FY20E), in our view. We believe recent 30% stock correction has priced in FY20E weakness, and strong PC WFH demand, Belkin’s new TWS/wireless products and EV momentum will drive earnings recovery of 76%/16% YoY in FY21/22E. Maintain BUY with new TP HK$3.63 based on same 15x FY21E P/E (5-yr hist. avg.).
- FY20 results below on higher 4Q expense; PC/Belkin recovery offset by iPhone earphone removal. We believe elimination of in-box iPhone headphones, FV changes and higher tax expense are major reasons for FY20 earnings miss, which offset strong WFH-driven PC demand and Belkin recovery in 2H20E. For FY20E, we estimate PC/auto/connected home grew 8%/13%/6% YoY, while mobile (iPhone earphone)/ communications/smart accessories declined 10%/10%/6% YoY. For 4Q20E, we estimate net profit dropped 13%/38% YoY, compared to NP decline of -21%/-66%/-98% YoY in 3Q/2Q/1Q20.
- Outlook: New product launches and improving profitability. Looking into 2021, in addition to PC/Belkin’s continued recovery and EV solutions strength, we expect FIT to accelerate 5G/smart home product launches, such as 5G handset antenna, backplanes in base stations and Belkin’s wireless/ audio (TWS/speakers). In particular, we expect better revenue mix with less iPhone earphone/optical modules will boost profitability and drive earnings recovery in FY21E. We expect FIT’s earnings to rebound 76%/16% YoY in FY21/22E.
- Attractive risk/reward; Reiterate BUY with new TP of HK$3.63. We cut our FY20-22E EPS by 6-27% to reflect FY20 results and better GPM on improving revenue mix (less earphone, optical modules). Our new TP of HK$3.63 is based on same 15x FY21E P/E (in-line with 5-year hist. avg.). We estimate 43% EPS FY20-22E CAGR, backed by 3% revenue CAGR and NPM recovery to 5.4% in FY22E (vs 2.8% in FY20E). Trading at 11.4x FY21E P/E (1-sd below avg), we think risk-reward is attractive. Upcoming catalysts include new products from Belkin and improving margins.
