Unisem’s 1H18 core net profit of RM37m (-59% YoY) was in line with ours but below consensus. 2Q18 performance recovered partly aided by the more favourable FOREX. Under-leveraged balance sheet coupled with prudent CAPEX solidifies dividend commitment. 3Q18 USD turnover was guided to gain 0-5%. Raise our USD/MYR assumption and PE multiple to 15x, in turn TP is higher at RM2.55 (from RM2.08). Maintain HOLD.

Within expectations: 1H18 revenue of RM665m translated into a much-anticipated core net profit of RM37m, accounting for 42% of our full year forecast but miss consensus at 35%.

Dividend: Recommended an interim tax-exempt dividend of 2.5 sen per share (2Q17: 3.5 sen) which goes ex on 20 Aug.

QoQ: As per guidance, 2Q18 turnover was 7% higher due to stronger USD and low base effect from the seasonally weak 1Q18 (generally shorter work days in the quarter and China plant closure due to major festive holidays). Core net profit surged by 31% attributable to higher revenue and better economies of scale.

YoY: Despite the 3% gain in USD top line, reported revenue in RM contracted by 6% no thanks to the unfavourable FOREX during the quarter (2Q17: RM4.33/USD; 2Q18: RM3.95/USD). Eventually, core earnings plummeted by 52% which may be explained by revenue mix where higher-margin wlCSP / bumping contributions were larger in 2Q17 (30% vs 27% in 2Q18).

YTD: Top line fell by 8% as the stronger RM negated the 2% growth in USD term. For the same reason as above, core net profit also plunged by 59%.

Performance by products. Revenue contribution from wlCSP / bumping fell to 27% (1Q18: 29%) as one of its microphone clients, Akustica (a wholly-owned subsidiary of Bosch) has been shut down after failing to find a strategic buyer or partner. Unisem expects this void to be filled up by the next generation microphone vendor, Vesper in 2H18 after it has few design wins. Others were pretty stable.

Batam: Generated ~USD10m revenue in 2Q18 and more capacity is being added. Confident to achieve EBITDA breakeven in 2H18 based on the current run rate of USD3.8m turnover per month.

CAPEX. Incurred RM34m in 2Q18 and will expand the remaining Chengdu Plant 2 with an investment of RM30m. Unisem reiterated its prudence in spending, indirectly solidifying its dividend commitment. UAT (Ipoh) bump expansion (cleanroom Class 100) to be completed by first week of Aug and followed by equipment loading. After qualification, production is planned to commence in 1Q19.

Guidance. Expect recovery in 3Q18 with sequential USD revenue growth of 0-5% driven by IoT, power management and automotive.

Forecast: Tweak our USD/RM (from 3.9 to 4.1) assumption. In turn, FY18-20 EPS were upped by 4%, 6% and 6%, respectively.

Maintain HOLD after raising our TP by 23% from RM2.08 to RM2.55 as we pegged FY19 EPS with a higher PE of 15x (previously 13x) in view of its modest recovery and more favourable FOREX environment. Although we like its exposures to automotive and China market, we will remain cautious unless USD appreciates drastically.

Source: Hong Leong Investment Bank Research - 3 Aug 2018