• 4Q18 core earnings fell 26% yoy and 33% qoq as sales from both the US and Asia markets weakened amidst the US-China trade tensions. Earnings were also affected by higher depreciation and unfavourable forex.

• Overall, 2018 core earnings slumped by 40% but were broadly in line with our estimates at 94% and consensus’ at 99%.

• Maintain SELL at RM2.50 TP. We remain negative on Unisem’s prospects despite collaboration with new shareholder, TSHT, in view of: (i) uncertainty over US-China trade tension affecting the automotive sector and (ii) easing smartphone sales.

Impacted from US-China trade tension

4Q18 core earnings slumped 26.4% yoy and 33.3% qoq to RM23.6m on weaker sales volume from both US and Asia market, drawing impact from the US-China trade tension. It was further weighed down by higher depreciation and unfavourable forex during the quarter.

Disappointing 2018

Overall, 2018 core earnings fell 39.8% to RM95.9m in tandem with lower revenue (-7.8%). We note that EBITDA margin fell 350bps to 20.3% as contribution from high-margin products (automotive segment) were affected by the US-China trade tension. Overall, 2018 core earnings were broadly inline with ours and consensus estimates at 94% and 99% respectively.

Outlook remains unfavourable

We remain cautious over its prospects given unfavourable outlook for communication (c.25% of sales) and power management (c.18% of sales) segments amidst easing demand for non-android smartphones. Meanwhile, management expects the weakness at its automotive segment to prevail in 1H19 before recovering in 2H19 with new clients on board arising from its collaboration with TSHT.

Dividend declared

A final DPS of 3sen was declared, translating to 7.5sen (FY17: 11sen) 2018 DPS. This implies total dividend payout of 57%.

Maintain SELL at RM2.50 TP

We maintain our SELL call on the stock with a RM2.50 TP (WACC: 9.4%, g: 1%), implying 2019/20F PE of 17x/15x. Our negative view on the stock is premised on uncertainties over the US-China trade tension which would affect overall orders from customers. However, there could be some earnings reprieve in the medium to longer term resulting from collaboration with TSHT as its customer base expands.

Source: BIMB Securities Research - 26 Feb 2019