Unisem’s 1Q18 core net profit of RM16m (-56% QoQ; -65 YoY) was a big miss. Despite the seasonal weakness, 1Q18 performance was impacted by (1) unfavourable FOREX; (2) wage increment; and (3) lower ASP. Under-leveraged balance sheet coupled with prudent CAPEX implied dividend commitment. 2Q18 USD turnover was guided to gain 5-10%. Cut our earnings forecasts and led to a lower TP of RM2.08.

Below expectations: 1Q18 revenue of RM322m translated into a disappointing core net profit of RM16m, only accounting for 10% of ours and consensus full year forecasts, respectively.

Dividend: None (1Q17: none).

QoQ: As per guidance, 1Q18 turnover was 5% softer in USD term mainly due to seasonal weakness (generally shorter work days in the quarter and China plant closure due to major festive holidays). However in local currency, the decline was larger at 10% exacerbated by the stronger RM. Core net profit plunged by 56% attributable to (1) wage increment; (2) lower ASP; and (3) greenback depreciation, which led margin pressure.

YoY: Despite the 1% gain in USD top line, reported revenue in RM actually contracted by 11% which eventually led core earnings to plummet by 65%. This can be explained with the same reasons above.

Performance by products. Revenue contribution from wlCSP / bumping fell to 29% (4Q17: 33%) due to sluggish smartphone demand and was impacted by inventory adjustment of retail RFID. Others were pretty stable.

Strong balance sheet. Maintain its net cash position of RM252m or RM0.34 per share as end of 1Q18.

CAPEX. Incurred RM45m in 1Q18 on wirebonder, testers and handlers in order to cope demands from IoT and power management. Unisem reiterated its prudence in spending, indirectly solidify its dividend commitment.

Expansion. UAT (Ipoh) bump expansion is on track with target completion by Jun / Jul 2018.

Guidance. Expect recovery in 2Q18 with sequential USD revenue growth of 5-10% driven by IoT, power management and automotive. Only envisage a turnaround from smartphone in 2H18, in tandem with blockbuster device launches towards year end.

Forecast: Tweak our margin and USD/RM (from 4.1 to 3.9) assumptions. In turn, FY18-19 EPS were slashed by 45% and 29%, respectively.

Maintain HOLD after lowering our TP by 29% from RM2.94 to RM2.08 , reflecting the downward revision in earnings. Our fair value is based on unchanged 13x of FY19 EPS. Although we like its exposures to automotive and China market, we will remain cautious unless USD appreciates drastically.

Source: Hong Leong Investment Bank Research - 25 Apr 2018