Unisem’s 9M19 core net profit of RM40m (-38% YoY) met ours but below consensus. The disappointment was due trade disputes and softness in automotive. Guided that 4Q19 to be flat sequentially in USD term. Batam closure will continue drag in the near term. We reiterate SELL call with unchanged TP of RM1.72, pegged to 15x of FY20 EPS. Unisem has until 31 Dec 2019 to comply with the public shareholding spread.

Match ours but below street’s. Despite the reported loss, 3Q19 core was profitable with RM21m (+94% QoQ, -23% YoY) brought 9M19’s total to RM40m (-38% YoY), forming 65% and 60% of HLIB and consensus full year forecasts, respectively. Unisem attributed this underperformance on (1) trade conflicts leading to supply chain realignment; and (2) sustained weakness in automotive. One-off adjustments include Batam’s termination benefits (RM22m), deferred tax (RM7m), forex gain (RM4m), inventory provision and grant income.

Dividend. Recommended a second interim tax-exempt dividend of 2.0 sen per share (3Q18: 2.0 sen) which goes ex on 20 Dec. YTD dividend amounted to 4.0 sen (9M18: 4.5) sen per share.

QoQ. Despite industry wide recovery, 3Q19 turnover only gained 1% as Batam began to wind down. As forex was relatively stable, sales also expanded 1% in USD terms; in line with earlier guidance. Core net profit grew by 94% attributable to favourable product mix where sales contributions from higher-margin wafer-level and bumping products added 2ppt to 33%.

YoY. Despite the greenback boost (3Q19: RM4.16/USD vs. 3Q18: RM4.10/USD), top line was 11% lower mainly attributable to the decrease in sales volume. In USD term, revenue declined by 12%. Eventually, core earnings dropped by 23% along with diminishing economies of scale.

YTD. For the same explanation above, revenue and core earnings fell by 9% and 38%, respectively despite the stronger greenback.

UAT stake acquisition. It purchased the remaining 7.59% stake in Unisem Advanced Technologies (UAT) from FlipChip International for a cash consideration of RM7.1m. UAT will be a fully owned subsidiary going forward.

More pain from Batam. As highlighted before, this will lead to short term pain before reaping the benefit over the long run. Unisem guided that 4Q19 will be impacted by impairment charges which is likely to be larger than in 3Q19. Expect to release another 800-1k staff when it is completely closed for operation next year.

Outlook and guidance. Microphone will begin to ramp in 2H19 at Chengdu plant. It guided that 4Q19 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. Unchanged as Results Were in Line.

Maintain SELL. Reiterate our bearish stance despite the strong sequential recovery which was much anticipated and even with that, valuation appears to be very rich (>30x PE). Our TP is unchanged at RM1.72, 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 and the risk of being delisted should not be ignored.

Source: Hong Leong Investment Bank Research - 4 Nov 2019