• Unisem’s 1Q18 core profit fell 86.5% yoy and 81.1% qoq in tandem with lower revenue (-10.7% yoy, 10.0% qoq).

• Lower revenue contributions were due to strengthening ringgit and realised forex loss of RM10.0m in 1Q18.

• Gross profit margin contracted to 10.2% from 18.9% on higher mix of low margin products (ie. leaded components).

• Overall, Unisem’s 1Q18 core earnings underwhelmed ours and consensus’ expectation at only 4% of FY18 earnings. We make no changes to earnings as we expect stronger demand for its MEMS segment as well as better cost management.

• Maintain BUY with a TP of RM3.20. At our TP, the stock implies FY18F PE of 15.0x before easing to 13.4x in FY19F.

Lower revenue due to unfavourable forex

Unisem’s 1Q18 earnings fell 86.5% yoy and 81.1% qoq in tandem with the revenues which fell 10.7% yoy and 10.0% qoq. Revenue weakened due to the strengthening ringgit against the dollar while product mix was also skewed to low-margin products. The earnings setback was also exacerbated by realised loss amounting RM10.0m.

Higher products mix dragged earnings

Given the unfavourable forex rate, gross profit margin contracted to 10.2%. This is a 530bps qoq and 870bps yoy decline from the >18% GP margin in those last 2 comparable quarters. The decline was also attributed to higher sales of low margin products. Overall, Unisem’s 1Q18 core earnings made up only 4% of ours and consensus’ FY18F estimates.

Remain positive, BUY at a TP RM3.20

Maintain BUY with an unchanged TP of RM3.20 (WACC: 9.4%, terminal growth rate: 1%). We arrived to our TP based on GGM formula that implies a fair EV/ROIC multiple of 1.8x. For now, we remain positive on the stock as we expect strong growth in the MEMs segment underpinned by higher demand for IoT applications as well as better cost management.

Source: BIMB Securities Research - 25 Apr 2018