Investment Highlights

• We maintain our SELL recommendation on Unisem with a lower fair value of RM1.90/share. We cut our FY19–FY21 earnings forecast by 13%–19% to account for a prolonged weakness in the automotive sector and lower demand for power management chip packages. Our valuation is pegged to an unchanged FY19F PE of 14x.

• For 1QFY19, the company recorded a core net profit of RM8.6mil (-61% QoQ, -46% YoY), which only accounted for 7% of our full-year forecast and 8% of consensus estimate. While 1Q has been seasonally weaker for the company due to the Chinese New Year holiday in China, the 61% QoQ decline was mostly attributable to the slowdown in car sales, both in China and Europe.

• China vehicles continued to face lacklustre demand with sales numbers falling for the ninth straight month in March (-5.2% YoY). Sales of European vehicles are still feeling the negative impact (-3.6% YoY in March) of the World Harmonised Light Vehicle Test Procedure (WLTP) that was implemented in Oct 2018, rendering some models non-compliant with a new ruling for carbon emission. Manufacturers are still cautious on the outlook, holding back on new orders to clear out existing inventories.

• Revenue fell by 5.7% YoY to RM303.1mil largely due to the reduction in orders across the range while product mix remained fairly unchanged. Contribution from the consumer segment dipped 2% while the communication segment added 2%.

• Moving forward, the group guided for a 5%–10% QoQ revenue jump for 2QFY19, supported by improved demand for radio frequency (RF) packaging from China smartphones and 5G infrastructure. Overall, Unisem is expecting low single-digit revenue growth for FY19, backed by a further expansion of its Micro-ElectroMechanical Systems (MEMS) microphone packaging to 5– 10mil/month from 3mil/month.

• The new dual-capability (8-inch and 12-inch) bumping facility in Ipoh and Chengdu, China, is expected to increase Unisem's bumping capacity to 25K wafers/month from circa 16K wafers/month, and potentially raise ASPs given 12-inch wafers command 2x the pricing of 8-inch wafers. Management has completed the installation and expects to conclude the qualification process for several new customers to use the facility in the near future. Earnings contribution is anticipated 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 18.4x, a slight premium to its 3-year average of 14x.

Source: AmInvest Research - 26 Apr 2019