Highlights

• Interpreting recent market data, we are turning positive on Unisem and forecast 4Q results to be the strongest in FY16.
• According to SIA, 4Q16 worldwide semiconductor sales of US$93.0bn (+12.3% yoy; +5.4% qoq) propelled FY16 to end with highest-ever annual sales at US$338.9bn (+1.1% yoy), despite US$ strength. Regionally, China recorded the highest growth with 9.2% yoy.
• On the domestic scene, Malaysia’s E&E exports rebounded in 4Q16, rising 7.5% yoy (3Q16: -0.7% yoy). This was likely boosted by higher RM translation as it was weaker in 4Q16. On the production front, E&E output growth was resilient at 7.0% yoy in 4Q16 (3Q16: +7.4% yoy), driven primarily by semiconductor and electronic components output (+10.9% yoy; 3Q16: +10.9% yoy).
• As RM weakened -7.2% qoq and -1.4% yoy to RM4.34/US$ in 4Q16, this will act as a booster to Unisem as majority of its revenue is denominated in USD.
• Recent peer results also showed major improvements with solid demand from automotive segment. We understand that production continued in end of January despite major festive holidays, implying robust orders especially in China.
• Automotive is becoming a significant catalyst for the sector as more ICs are embedded for lighting, communication, safety, infotainment, etc. while hybrid and electric cars will further spur demand. According to Gartner, automotive IC is forecasted to grow 6-8% yoy from 2017 till 2020, outpacing global semiconductor average sales growth assumption.
• Unisem owns an edge in technology with its wafer level chip scale packaging (wlCSP) which is gaining popularity due to small form factor / miniaturization trend. This advanced packaging usually commands higher margins
• Healthy balance sheet with a net cash position of RM109.5m as of 3Q16. Prudent CAPEX policy allows room for dividend which is projected with a yield of 4.3% for FY16.

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

• Fine-tune USD/MYR and margin assumptions which lead to upward revisions of FY16-18 EPS by 12.2%, 11.8% and 11.1%, respectively.

Rating

TRADING BUY ↔, TP: RM2.92 ↑

• Besides being the major beneficiary of strong greenback, we like its (1) exposure to the automotive sector; (2) strategic presence in China’s booming tech market; (3) healthy balance sheet; and (4) rewarding dividend yield.

Valuation

• Upgrade from HOLD to TRADING BUY after raising our TP by 12.3% from RM2.60 to RM2.92 reflecting the upward EPS revision. TP is pegged to 13x of FY17 EPS.

Source: Hong Leong Investment Bank Research - 14 Feb 2017