Unisem’s 1H19 core net profit of RM18m (-51% YoY) was below expectations. The disappointment was due trade disputes resulting lower-than-expected top line and margin deterioration. Guided that 3Q19 to be flat sequentially in USD term. Batam closure is short-term negative but long-term positive, in our view. We reiterate SELL call with lower TP of RM1.72, pegged to 15x of FY20 EPS. Unisem has until 31 Dec 2019 to comply with the public shareholding spread.

Below expectations. 2Q19 core net profit of RM9.7m (+17% QoQ, -54% YoY) brings 1H19’s total to RM18m (-51% YoY), forming 18% and 20% of HLIB and consensus full year forecasts, respectively. Unisem attributed this underperformance on trade disputes resulting to lower-than-expected top line and margin deterioration. One-off adjustments include forex gain, inventory provision and grant income.

Dividend. Recommended an interim tax-exempt dividend of 2.0 sen per share (2Q18: 2.5 sen) which goes ex on 22 Aug.

QoQ. Also aided by the stronger USD (2Q19: RM4.15/USD vs. 1Q19: RM4.09/USD), 2Q19 turnover gained 3% thanks to stronger sales volume. Sales expanded 2% in USD terms; this is way below earlier guidance of 5-10% growth. Core net profit grew by 17% attributable to improved EBITDA margin which may due to favourable product mix (higher contribution from high-margin wafer-level and bumping products).

YoY. Despite the greenback boost (2Q19: RM4.15/USD vs. 2Q18: RM3.95/USD), top line was 9% lower mainly attributable to the decrease in sales volume. In USD term, revenue declined by 13%. Eventually, core earnings dropped by 54% along with diminishing economies of scale.

YTD. For the same explanation above, revenue and core earnings fell by 8% and 51%, respectively despite the stronger greenback.

Outlook and guidance. Subdued 2H19 due to (1) slow order resumption despite Huawei ban reversal; (2) China customers to focus on in-country sourcing; and (3) weakness in automotive. The closure of loss-making Batam plant is a short-term negative (may entail provisions for layoffs, shutdown and impairments) but a long term positive. Microphone will begin to ramp in 2H19 at Chengdu plant. All in, it guided that 3Q19 to be flat sequentially in USD term. Bursa has granted Unisem until 31 Dec 2019 to comply with the public shareholding spread or may be delisted.

Forecast. Tweak our model based on the deviations mentioned above. In turn, our FY19-21 earnings were cut by 38%, 17% and 5%, respectively.

Reiterate SELL after lowering our TP from RM2.04 to RM1.72 reflecting our earnings cut at the same time rolling forward our valuation. Our fair value is pegged to 15x of FY20 EPS). Despite the strengthening USD, we opine that there lacks near term catalysts amidst prolonged trade wars. Synergy with its parent company will take time to be extracted.

Source: Hong Leong Investment Bank Research - 7 Aug 2019