Investment Highlights

• We downgrade our recommendation on Unisem to SELL from ACCEPT OFFER with a lower fair value of RM2.34/share. We trim our FY19–FY20 earnings forecast by 1%–7% to account for prolonged weakness in car sales in China and lower smartphone sales due to the longstanding feud between the US and China. Our valuation is pegged to an unchanged FY19F PE of 14x.

• Cumulatively for FY18, the company recorded a core net profit of RM86.2mil (-48% YoY), which missed of our fullyear forecast by 8% and 11% of consensus estimate. Revenue fell by 7.8% YoY to RM1.35bil largely due to the strengthening of the MYR against the USD (+6.1% YoY in 2018). In USD terms, revenue only slid 1.8%. Note that almost all of Unisem’s revenue is denominated in USD.

• Unisem’s 4QFY18 core net profit came in at RM22mil, down 19.8% QoQ and 36% YoY. It attributed the fall to lower sales in December amid a weaker performance in the smartphone and power management segments. Core net profit is derived after stripping out the foreign exchange impact.

• Moving forward, the group guided for a 5%–10% drop QoQ in 1QFY19 revenue as earnings visibility has been obscured, particularly in the automotive segment due to the trade war between the US and China. Growth of China’s car sales turned negative since July 2018 and has now extended into the seventh month.

• In the longer term, Unisem remained slightly positive with projections of low single-digit revenue growth for FY19, backed by further expansion of its MEMS microphone packaging from 3mil/month to 5–10mil/month.

• Furthermore, the new dual-capability (8-inch and 12-inch) bumping facility in Ipoh and Chengdu, China, is expected to increase Unisem's bumping capacity from circa 16K wafers/month to 25K 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 in the near future, and anticipates earnings contribution to kick in subsequently.

• However, at the current price, we believe the stock is fairly valued. Unisem is currently trading at a 1-year forward PE of 18.5x, a slight premium to its 5-year average of 14x.

Source: AmInvest Research - 26 Feb 2019