Unisem’s FY18 core net profit of RM86m (-49% YoY) was below expectations. 4Q18 performance was impacted by lower volume loading and unfavourable forex. Started to experience slowdown in Dec and guided that 1Q19 to weaken 5-10% sequentially in USD term. As the takeover offer has expired and no catalyst in the near term, we downgrade our call to SELL with lower TP of RM2.21.

Below expectations. FY18 revenue of RM1.4bn translated into a core net profit of RM86m, accounting for 94% and 90% of ours and street’s full year forecast.

Dividend. Recommended a final tax-exempt dividend of 3.0 (4Q17: 4.0) sen per share which is subject to AGM approval. YTD dividend amounted to 7.5 (FY17: 11.0) sen per share, this is higher than HLIB’s expectation but below consensus.

QoQ. Despite the stronger greenback, 4Q18 turnover was 7% lower due to lacklustre sales volume. Sales declined 8% in USD term, this is also below its earlier guidance of flat to -5% fall. Core net profit fell by 16% attributable weaker EBITDA margin and higher effective tax rate (15% vs 3Q18’s 11%).

YoY. Revenue was lower by 7% mainly attributable to the decrease in sales volume while forex was largely unchanged at RM4.15-1.47/USD. In USD term, top line fell by 8%. Eventually, core earnings plunged by 37% which may be explained by lower margin arising from change in product mix where contribution from advance packaging and bumping fell from 33% to 30%.

YTD. Besides the stronger RM, topline fell by 8% as USA and Asia segments recorded declines of 4% and 17% respectively, more than sufficient to offset the Europe’s 7% growth. For the same reason above, core net profit plunged by 49%.

Ipoh bump fab. User acceptance test is completed and is currently loaded with 6-inch wafers. Unisem claimed that there is no pricing pressure as there is limited bumping vendor for 6-inch in the market. It is currently working on a new project for 8-inch wafer.

Microphone. This product is planned to be embedded into the blockbuster smartphone which will be launched by year end and Unisem is striving to fulfil the assembly requirements in Chengdu.

Batam. Unexciting as management shared that it has yet to achieve stable profitability. Unisem continues to execute its 3-year plan to turn it around.

Outlook and guidance. Started to experience slowdown in Dec and guided that 1Q19 to weaken 5-10% sequentially in USD term. Besides the seasonality effect, Unisem also shared that inventory issue remains persistent as customers are wary of the US-China trade spat. It is budgeted to be lower than FY18’s RM172m unless microphone demand picks up significantly in 2H19.

Forecast. Based on latest leading indicator and guidance, our FY19-20 earnings were cut by 14% and 4%, respectively. Downgrade our call from Hold to SELL after lowering our TP to RM2.21 (pegged to 15x of FY19 EPS), reflecting our downward earnings revision. As the takeover offer has expired, we opine that there lacks near term catalysts while the prolonged inventory adjustment and strengthening RM are unfavourable to Unisem. Synergy with its parent company will take time to be extracted.

Source: Hong Leong Investment Bank Research - 26 Feb 2019