• 2Q18/1H18 earnings fell 24%/57% yoy on unfavorable forex and sales mix but qoq core earnings recovered as a result of weaker ringgit; overall 1H18 earnings trailed ours and consensus FY18F.
• We slashed our FY18F/FY19F/FY20F earnings by 35%/24%/20% on lower sales as a result of stronger US$/RM rate and higher mix of low-margin products.
• We remain cautious over Unisem’s 2018 outlook given the stronger Ringgit coupled with slower mobile phone sales while near term uncertainty from the US-China trade war could weigh in further.
• Downgrade to HOLD with an RM2.40 TP based on GGM formula that implies fair EV/IC multiple of 1.3x (WACC: 9.4%, terminal growth rate: 1%).

Weaker yoy on forex and product mix

Unisem’s 2Q18/1H18 core earnings fell 24%/57% yoy due to weaker revenue. This was due to unfavourable sales mix and strengthening of the Ringgit in 1H18. Overall, EBITDA margin contracted by 620bps in 1H18 to 18.7% while core earnings trailed ours and consensus FY18 estimates at 24% and 35% respectively.

Strong qoq rebound

On the flipside, qoq earnings showed a huge improvement as core earnings surged by more than 100% on stronger US$/MYR rate.

Dividend declared

Unisem declared its interim dividend of 2.5sen per share and made up 28% of our full year DPS expectations of 9sen.

Briefing updates

Management guided for stronger 2H18 as it starts production of high end microphones. On the US-China trade war, management maintains its view that it is still too early to ascertain the impact to Malaysia’s OSAT although it believes that the impact to global trade would likely be negative overall.

Revisiting our forecast

We slashed our FY18F/FY19F/FY20F earnings by 35%/24%/20% as we lower sales expectations amidst stronger US$/RM rate and higher mix of low-margin products.

Downgrade to HOLD at a TP of RM2.40

We downgrade our recommendation to HOLD with a TP of RM2.40 (from RM3.20) based on GGM formula which assumes WACC of 9.4% and terminal growth rate of 1%. Our TP implies 17x FY18F PE and 13x FY19F PE. We believe this is fair given the unfavourable sales mix and forex rate.

Source: BIMB Securities Research - 3 Aug 2018