• Overall, 9M18 core earnings slumped 43% but were broadly in line with ours and consensus expectations at 71% and 73% of FY18 estimates. No change to our earnings forecast.

• 3Q18 earnings fell 13% yoy due to lower sales from key markets but rose 13% qoq on higher sales of high-value products.

• Despite concerns on US-China trade war, we believe Unisem’s plans to raise sales of high-end microphone business bodes well for its future earnings.

• Maintain HOLD with a higher TP of RM2.90 (roll valuation 1-year forward to FY19). Accumulate on dips.

Weaker sales due to trade tensions…

Unisem’s 3Q18 earnings fell 13% yoy in tandem with lower revenues from key markets; sales to the US fell 5% while that to Asia was down 11% over the same period possibly reflecting ongoing trade tensions between US and China. As a result, EBITDA margins contracted slightly to 22.6% (3Q17: 22.9%).

Dragged by weak 1Q

For the 9M18 period, core earnings which slumped 43% to RM72m. This was largely due to the unusually weak 1Q18 performance after one of its key clients exited the microphone business. However, we understand from management that orders have started to normalise in 3Q18 as it secured new clients. Overall, 9M18 core earnings were inline with ours and consensus expectations at 71% and 73% of FY18 forecast. No changes to our forecast.

Encouraging sequential growth

On qoq, core earnings grew 13% on higher revenue recorded which we believe was attributed to management’s guidance of a new client secured for its microphone segment. This was also compounded by higher mix of high-margin products and favourable forex rate.

Interim dividend declared

Unisem declared its interim dividend of 2sen per share and made up 50% of our full year DPS expectations of 9sen.

Mantain HOLD, higher TP of RM2.90

We maintain our HOLD call and roll our valuation 1-year forward to FY19; this raises our TP to RM2.90 (from RM2.40). We derive our TP based on the GGM formula which implies a fair EV/IC multiple of 1.6x (WACC: 9.4%, g: 1%). Despite concerns on US-China trade tensions, we are positive on Unisem given its plan to raise sales of high-end microphones. We also expect the joint collaboration with China-based semiconductor company, Tianshui Huatian Technology Co Ltd. (TSHT) to provide some earnings respite in near future.

Source: BIMB Securities Research - 2 Nov 2018