We maintain our ACCEPT OFFER recommendation on Unisem at the offer price of RM3.30/share, which represents a 32% upside from our fair value of RM2.50/share. Our valuation is pegged to an FY19F PE of 14x. We keep our earnings projections unchanged.
Cumulatively for 9MFY18, the company recorded a core net profit of RM64.2mil (-50.4% YoY), which accounted for 69% of our full-year forecast and 65% of consensus. While slightly below consensus, we deemed the result to be in line with our expectation as 4Q is expected to see a continuation of momentum from recent flagship smartphone launches and higher spending during the upcoming Christmas season.
Unisem’s 3QFY18 core net profit came in at RM27.5mil, representing an increase of 33% QoQ while registering a drop of 36% YoY. The core net profit is derived after stripping out a foreign exchange gain of RM8.15mil.
The 33% QoQ rise in 3QFY18 net profit was due to a slew of new flagship smartphone launches during the period which increased the demand of wafer-level chip scale packages (WLCSP) and micro-electro-mechanical systems (MEMS).
Comparing YoY, the 36% fall in net profit was mainly attributable to: (1) a less favourable USD against the MYR compared with a year ago (4.3 vs. 4.1); (2) higher effective tax rate; and (3) lower EBIT margin (3Q17: 23.5% vs. 3Q18: 20.4%). Note that practically all of Unisem's revenue is denominated in USD.
Moving into 4Q, the group anticipates more fan-out waferlevel packaging (FOWLP) jobs for several new products. The group is also expected to ramp up the production of MEMS microphones used for voice recognition.
With the new dual-capability (8-inch and 12-inch) bumping facility in Ipoh completed, it is expected to increase Unisem's bumping capacity from circa 20K wafers/month to 27K wafers/month, and potentially raise ASPs given 12-inch wafers command 2x the pricing of 8-inch wafers. Management expects to conclude the qualification process for several new customers to use the facility by 4QFY18, and anticipates earnings contribution to kick in subsequently.
At the current price, we believe the company is fairly valued. Unisem is currently trading at a 1-year forward PE of 16.5x, a slight premium to its 5-year average of 14x.
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