Investment Highlights

• We maintain HOLD on Unisem with a lower fair value of RM2.38/share (previously RM2.85/share) as we slash FY18F net profit by 37% and FY19F-FY20F by 15-17%. Our fair value is pegged to an unchanged FY19F PE of 13x.

• Unisem’s 1QFY18 core net profit came below expectations at RM16mil (-65% YoY; -56% QoQ), accounting for 10% of both our full-year forecast and consensus estimate. The core net profit is derived after stripping out a foreign exchange loss of RM10mil.

• The precipitous drop in earnings was mainly attributed to the weak USD/MYR. In 1QFY18, Unisem’s sales were transacted at an average USD/MYR of 3.93 compared with 4.45 in 1QFY17, representing a 12% decline. Recall that virtually all of Unisem's revenue is denominated in USD, whereas only 35-40% of its total costs is USD-based. This translates into an unfavourable 5% earnings sensitivity to every 1% depreciation in the USD/MYR. As a result, Unisem’s revenue in ringgit terms contracted 11% while cost of sales only declined 1%. In USD terms, however, the revenue was relatively more resilient with a 1% YoY improvement and a 5% QoQ decline as guided.

• The currency factor aside, earnings were also impacted by rising raw material prices, shorter working days and lacklustre demand in the communications segment.

• On a brighter note, management believes turnover will pick up 5-10% QoQ in 2QFY18 as the group comes off a low season. In addition, the group anticipates more fanout wafer-level packaging (FOWLP) jobs for several new products in 2HFY18. The group is also 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 that 12-inch wafers command 2x pricing as compared to 8-inch wafers. The new facility is slated for completion in June-July 2018. Management expects to conclude the qualification process for 3 new customers to use the facility by 4QFY18, and anticipates earnings contribution from 2HFY18 onwards.

• At the current price, we believe the company is fairly valued. Unisem is currently trading at a 1-year forward PE of 12x, just marginally below the sector’s average of 13x.

Source: AmInvest Research - 25 Apr 2018