Investment Highlights

• We maintain our HOLD recommendation on Unisem with a lower fair value of RM2.50/share (vs. RM2.56/share). Our fair value is pegged to an FY19F PE of 14x. We have trimmed our FY18F-FY20F net profit estimates by 2-3% to account for marginal increase in labour cost.

• Unisem’s 2QFY18 core net profit came in below our expectation and consensus at RM20.7mil (-49.5% YoY; +30% QoQ). The core net profit is derived after stripping out a foreign exchange gain of RM10mil.

• Cumulatively, 1HFY18 core net profit of RM36.7mil (- 57.5% YoY) accounted for 39% of our full-year forecast and 32% of consensus.

• The 30% QoQ increase in 2QFY18 net profit was due to a low base effect coming from 1QFY18, where the company suffered a precipitous drop in earnings due to a 12% decline in USD vs. the MYR (4.45 vs. 3.93) during that period. Recall that, virtually all of Unisem's revenue is denominated in USD, whereas only 35-40% of its total costs is USD-based.

• On the revenue front, Unisem recorded a decent growth in 2QFY18 at 6.7% QoQ, despite shorter working days and lacklustre demand in the communications segment.

• Management believes its turnover will see modest growth of 5% QoQ in 3QFY18 as the group comes off a low season. We believe this is achievable as 2H is normally a stronger period for semiconductor sales.

• In addition, the group anticipates more fan-out waferlevel 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 completed the new dual-capability (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 the pricing of 8-inch wafers. Management expects to conclude the qualification process for a few 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 14.5x, in line with its 5-year average of 14x.

Source: AmInvest Research - 3 Aug 2018