ELSOFT: Quarterly Recovery Driven by Medical Segment Amidst Sector Headwinds, ‘Buy’ Recommendation Affirmed

An investment bank maintains its “Buy” recommendation, albeit with a revised target price, for a semiconductor firm that reported a mixed financial performance. While the company’s nine-month core profit for the fiscal year 2025 (9MFY25) fell below expectations and saw a significant year-on-year decline, the third quarter (3QFY25) demonstrated a robust quarter-on-quarter recovery, primarily fueled by its medical device segment and effective cost management.

Performance Review

For the 9MFY25 period, the firm’s core profit stood at RM0.2 million, significantly missing estimates and representing a 90.2% decline from the previous year’s RM2.1 million. Revenue also saw a substantial 34.5% year-on-year drop to RM6.7 million, largely attributed to softer demand across most business segments.

However, the company showed promising signs of recovery in 3QFY25. Revenue surged by an impressive 104.4% quarter-on-quarter to RM3.3 million. This rebound was primarily driven by higher contributions from the medical device segment and a more stable performance in the automated test equipment segment. Supported by lower administrative expenses, the firm recorded a core profit of RM1.1 million for the quarter, a significant turnaround from a core loss of RM0.4 million in the preceding quarter. The group also declared a first interim dividend of 0.5 sen per share. Financially, the company’s balance sheet remains robust, with zero debt and a net cash position of RM79.3 million, equivalent to 11.4 sen per share, as of the end of 3QFY25.

Future Outlook and Challenges

Management anticipates continued challenges in the semiconductor segment, particularly in the automotive, general lighting, and smart device markets, due to subdued demand and cautious customer spending. Despite this, the medical devices segment is projected to be a key earnings driver in the upcoming quarters, expected to partially offset the broader slowdown in semiconductor-related sales.

Reflecting these softer sales expectations, earnings forecasts for FY25, FY26, and FY27 have been revised downwards. The investment bank now projects core profits of RM2.1 million, RM8.9 million, and RM9.2 million for these fiscal years, down from earlier estimates of RM4.8 million, RM10.2 million, and RM10.9 million, respectively.

Valuation and Recommendation

Following the revision of earnings forecasts, the investment bank has tweaked its target price lower from RM0.37 to RM0.32, based on 25 times its calendar year 2026 (CY26) earnings. Despite the adjusted target price and revised outlook, the “Buy” call on the stock is maintained. Key risks identified include weaker-than-expected demand for both automated test equipment and medical devices, alongside potential disruptions from geopolitical tensions that could impact economic growth and supply chains.