Results

• Undershooting revenue guidance, 9M16 core net profit of RM102m was a disappointment, accounting for 70% and 65% of HLIB and street’s full year estimates, respectively.

Deviations

• Weaker-than-expected revenue.

Dividends

• Recommended a second interim tax-exempt dividend of 3.5 sen per share (3Q15: 3.0 sen) which goes ex on 6 Dec.

• YTD dividend amounted to 7 sen (9M15: 6 sen) per share.

Highlights

• YoY: Top line was weaker by 2.3% due to product mix which skewed towards lower value range – leaded at the expense of wlCSP / MEMs / bumping. This has also taken a toll on margin which eventually led to lower core PAT by 30.3%.

• QoQ: Another flattish quarter despite stronger greenback. In USD term, it was lower by 0.7% against guidance of zero to 5% growth. Firmer bottom line was mainly contributed by larger FOREX gain.

• YTD: Revenue growth of 5.7% was mainly attributable to USD strength where it actually fell by 2.6% in USD term. Stripping out FOREX distortion, core earnings grew by 3.0%.

• Utilization rate largely unchanged qoq with wlCSP/bumping at ~78%, leadless at ~68% and leaded at ~58%.

• After spending RM106m YTD, CAPEX in 4Q16 will be lower in line with prudency measure while trying to meet dividend commitment (one third of EBITDA).

• Batam continues to be a drag and yet to achieve EBITDA positive. Continuous focus to trim cost, especially in wages while boosting sales to turn it around in FY17.

• Although Unisem experienced ramp for new US smartphone, it is still too early to conclude its popularity. It was not affected by the global recall of a S. Korean phone.

• 4Q16 revenue (USD term) is guided to be flat qoq.

Catalysts

• Improved consumer confident and spending.

• Technological advancement and creation of new electronics.

Risks

• FOREX, weak consumer demand, labour wage hike and continuous drag by Batam’s performance.

Forecasts

• Our sales assumptions are lowered in line with industry latest global semiconductor market sales forecast. In turn, this has led to the downward revision in FY16-17 EPS by 4.4% and 7.2%, respectively.

Rating

HOLD ↓, TP: RM2.60 ↓

• Cautious tone on the near term prompted us to be more conservative with wait-and-see attitude. However, we do like Unisem’s (1) exposure to the automotive sector; (2) healthy balance sheet; and (3) rewarding dividend yield.

Valuation

• Downgrade from TRADING BUY to HOLD after cutting our TP by 7.5% from RM2.81 to RM2.60, reflecting our earnings revision. Our fair value is pegged to 13x of FY17 EPS.

Source: Hong Leong Investment Bank Research - 4 Nov 2016