Investment Highlights

• We maintain HOLD on Unisem with an unchanged fair value of RM2.85/share, pegged to an unchanged FY19F PE of 13x. We have fine-tuned up our FY18F-FY19F net profit forecasts by 0.5-2.0% for housekeeping reasons.

• Unisem's FY17 core net profit came in within expectations at RM166mil, representing a YoY improvement of 13%. This is after adjusting for exceptional items including grant income, property disposal gains and foreign exchange loss, which collectively amounted to a net loss of RM6mil. The YoY profit growth was in line with revenue expansion of 11%, which stemmed from higher volume, ASPs and the appreciation of USD/MYR (FY17: 4.30 vs. FY16: 4.15).

• For 4QFY17, Unisem registered a core net profit of RM36mil, declining 15% QoQ and 22% YoY owing in part to higher raw material costs and the weaker USD/MYR. 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.

• Moving into 1QFY18, earnings are expected to be soft due to seasonality, shorter working days and lacklustre demand in the communications segment. On a positive note, management anticipates more fan-out wafer-level packaging (FOWLP) jobs for several new products in 2HFY18. In addition, the group is expected to ramp up the production of micro-electro-mechanical systems (MEMS) microphones used for voice recognition in 2HFY18.

• The group has started the construction of a new dualcapability (8-inch and 12-inch) bumping facility in Ipoh. The new facility will increase Unisem's bumping capacity from circa 20k wafers/month to 27k wafers/month, and potentially increase ASPs given 12-inch wafers command 2x pricing as compared to 8-inch wafers. The new 8-inch equipment is expected to be ready by 4QFY18, and 12- inch by 2QFY19.

• At the current price, we believe the company is fairly valued. Unisem is currently trading at a CY18F PE of 14x, slightly above the average of the semiconductor manufacturing sector at 13x.

Source: AmInvest Research - 23 Feb 2018