Investment Highlights

• 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.

• We came away from Unisem’s 3QFY18 briefing learning that its 4Q earnings will not see any surprise, as the management guided a flat QoQ growth. With concerns surrounding the US-China trade war with regards to technology dispute and a less favourable global market condition, several of its customer relating to power chips and IoT players are carrying out inventory adjustments by holding off from placing orders until the very last possible minute. Our earnings forecast has taken into account for the flat growth in 4Q.

• In terms of product breakdown (in USD), the consumer and automotive segment continued to experience growth, recording a climb of 3% and 2% respectively due to increased complexity in semiconductor content, while the PC and communication segment saw marginal decline of 4% and 2% respectively, owing to tapering demand. Meanwhile, the industrial segment remained flat.

• Moving into 4Q, Unisem expects the automotive segment to continue growing, albeit at a gradual pace. This would translate into more fan-out wafer-level 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.

• Pertaining to the takeover offer by Tianshui Huatian Technology Co Ltd (TSHT), the group reiterated that this exercise will be synergistic for both parties given their respective customer bases. Unisem has 60% of its revenue coming from the American and European region while TSHT’s revenue is mostly concentrated in China.

Source: AmInvest Research - 5 Nov 2018