Investment Highlights

• We maintain our HOLD recommendation on Unisem with an unchanged fair value of RM3.32/share, pegged to FY18F of 13x. We have trimmed our FY17F earnings by 7% following a slight disappointment in 3QFY17 results.

• Unisem's 3QFY17 core net profit came marginally below our expectation and consensus at RM43mil, which represents increases of 34% YoY and 5% QoQ. Cumulatively, 9MFY17 core net profit of RM129mil (+29% YoY) accounted for 69% of both our full-year forecast and consensus.

• The results disappointment stemmed from an unfavourable product mix and a lower-than-expected USD/MYR rate (4.26 in 3QFY17 vs. 4.34 in 2QFY17). As a result, the group's pretax margin shrunk 1.2ppts from 13.1% in 2QFY17 to 11.9% in 3QFY17.

• On the revenue front, Unisem recorded a commendable 15% growth in 9MFY17, owing in part to higher USD. We note that the revenue growth would have been lower at 9% after stripping out impact from forex. Management said that volume has increased as the group received higher orders for smartphones.

• For 4QFY17F, management expects the group to register a flattish QoQ growth, as production of wafer-level chipscale packages (WLCSP) declines. This is resulted from several Unisem's customers switching away from WLCSP. We have also gathered that, some of Unisem's customers currently have their own facilities for the production of WLCSP.

• On a positive note, the group is expected to ramp up production of micro-electro-mechanical systems (MEMS) microphones used for voice recognition in 2HFY18. This is expected to boost revenue in FY18F and FY19F, and help offset any negative impact from the loss of WLCSP orders.

• In view of increasing demand flip-chip packaging, the group plans to add another 6 flip chip machines by 4QFY17. In addition, management is planning to invest in 12-inch fan-out wafer level packaging facilities, which would typically take 6-9 months for procurement. Altogether, these are expected to underpin Unisem’s revenue and net profit CAGR of 5% from FY16 to FY19F.

• Unisem is currently trading at FY18F PE of 16x, which represents 1SD above its 3-year historical average. We believe Unisem's projected earnings CAGR of 5% (FY16- FY19F) does not justify a premium valuation.

Source: AmInvest Research - 2 Nov 2017