1Q ‘09 sales rose a robust 31% yoy underpinned by 41% yoy increase in demand for telco equipment (higher demand for satellite terminals and catch up in delayed orders of microwave radio equipment) and 16% yoy increase in demand for infocomm equipment (higher sales of network equipment to service providers and point of sale terminals to the financial services and retail market), in line with management’s guidance.

Unfortunately, net profit only grew 8.6% yoy, below our expectation of double digit growth and way below sales growth of 31% due to gross margin pressure (fell from 23% to 19.5%), 225% increase in warranty provisions and forex loss of $1.05mln due to the surging US$.

Looking ahead, due to the current global economic slowdown, management has turned cautious and expects some of their telco customers to delay or defer projects in line with potentially lower revenues, while competition remains intense and some equipment vendors have positioned aggressively in the market and customers are also demanding for lower costs and better terms.

The infocomm business will also be negatively impacted by the global economic slowdown as a result of the slower retail environment and financial institutions are cautious in their capex plans due to the global financial crisis. Media and broadcasting customers are also seeing reduced advertising revenues which will delay migration of analogue TV to digital TV system in some countries. One bright spot is government spending which is seeing higher orders due to pump priming efforts.

In Feb ’09 when the company reported full year 2008 results, management said that the global economic downturn has created many uncertainties but did not provide more specific details. They are now seeing customers in both market segments realigning their capex plans which means delay or deferring projects in line with potentially lower revenues.

Fortunately, the company’s financial position remains as strong as ever with cash holdings rising $10.3mln qoq to $31.146mln versus debts of only $108,000, giving a net cash position of $31.038mln representing 28.6% of its current market cap. This will help them sustain their usual 3 cents div per share (going ex on 29 Apr ’09).

However, with the stock having recovered a strong 67% since hitting its all time low in Oct ’08 & 54% since our last BUY recommendation and with management turning cautious in their outlook statement we are downgrading our recommendation to HOLD (expecting some support from its still decent 10% yield).