Investment Highlights

• We maintain HOLD on Unisem with a revised fair value of RM2.85/share (previously RM3.32/share), pegged to an unchanged PE of 13x. We have rolled forward our earnings base from FY18F to FY19F.

• We have trimmed our FY17F net profit forecast by 6% after revising our 2017 USD/MYR assumption from 4.35 to 4.30. In addition, FY18F-FY19F net profit forecasts are slashed by 15-18% mainly on account of a change in our USD/MYR assumption from 4.12 to 3.95 for both years.

• Currently, the majority of Unisem's revenue is denominated in USD, whereas only ~40% of total costs is USD-based. Our sensitivity analysis shows that for every 1% depreciation in the USD/MYR, Unisem's earnings would decline by 5%.

• Taking Malaysian Pacific Industries' results as a bellwether, we believe the group is adversely affected by both rising commodity prices and the weak USD in 4QFY17F. To put it into perspective, the USD vs. MYR has depreciated 5.6% from 4.30 at the beginning of 3QFY17 to 4.05 at the end of 4QFY17F. In addition, copper and gold prices have risen by 22% and 6% respectively during the same period.

• Recall that management has guided the group would register a flattish QoQ revenue growth (in USD terms) owing to a decline in wafer-level chip-scale packages (WLCSP) production. Coupled with the unfavourable factors above, we believe Unisem will register a QoQ decline in 4QFY17F net profit — hence our earnings revision.

• On a positive note, the group expects to ramp up the production of micro-electro-mechanical systems (MEMS) microphones used for voice recognition in 2HFY18. In addition, the group plans to add another 6 flip-chip machines by 4QFY17, and invest in 12-inch fan-out wafer level packaging facilities. Altogether, we expect these to fuel revenue growth in FY18F and FY19F (in USD terms), and help soften the negative impact from the above factors.

• At the current price, we believe the company is fairly valued. Unisem is currently trading at a CY18F PE of 13x, on par with the average of the semiconductor manufacturing sector at 13x.

Source: AmInvest Research - 7 Feb 2018