Unisem’s 1Q19 core net profit of RM8m (-63% QoQ, -48% YoY) was below expectations. The underperformance was due to lower volume loading and unfavourable product mix. Guided that 2Q19 to expand 5-10% sequentially in USD term and warned of cautious outlook for 2H19. We reiterate SELL call with lower TP of RM2.04, pegged to 15x of FY19 EPS. Stronger greenback is the only catalyst in the near term.

Below expectations. 1Q19 revenue of RM303m translated into a core net profit of RM8m, accounting for 8% our and consensus full year forecast, respectively.

Dividend. None (1Q18: None).

QoQ. Apart from the RM appreciation (1Q19: RM4.09/USD vs. 4Q18: RM4.17/USD), 1Q19 turnover was 9% lower due to lacklustre sales volume and seasonal weakness. Sales declined 7% in USD term, this is in line with its earlier guidance of 5-10% fall. Core net profit plunged by 63% attributable weaker EBITDA margin which may due to unfavourable product mix with a higher contribution from low-margin leaded products.

YoY. Despite the greenback boost (1Q19: RM4.09/USD vs. 4Q18: RM3.92/USD), top line was 6% lower mainly attributable to the decrease in sales volume. In USD term, revenue declined by 10%. Eventually, core earnings dropped by 48% mainly due to disappointing sales.

Market segment. Demand from communication continues to be supported by China smartphone and 5G infrastructure. Auto is not yet out of the woods although TPMS is stable. Order for specialist power management devices remains strong but standard ones are lacklustre.

Outlook and guidance. Guided that 2Q19 to grow 5-10% sequentially in USD term and warned of cautious outlook for 2H19.

Forecast. Based on latest leading indicator and guidance, our FY19-20 earnings were cut by 7% and 8%, respectively. Reiterate SELL after lowering our TP to RM2.04 (pegged to 15x of FY19 EPS), reflecting our earnings cut. Despite the strengthening USD, we opine that there lacks near term catalysts amidst prolonged inventory adjustment. Synergy with its parent company will take time to be extracted.

Source: Hong Leong Investment Bank Research - 26 Apr 2019