Unisem’s 9M17 earnings grew 28% yoy but fell below expectations, accounting for 72%-70% of our and street estimates. While 3Q17 revenue growth came in within expectations, the impact was negated by continued appreciation of the RM. The strength in the latter has resulted in the third consecutive quarter of margin compression (declining from its recent peak of 27.5% in 4Q16 to the current level of 23.7%), and we expect a further squeeze as the RM strengthens further. With flat revenue growth guidance in 4Q17, we believe that there could be further downside risk to earnings. Maintain SELL.

3Q17 Headline Profit Slips 4% Qoq, Margins Contract Further

Despite a 5% qoq growth in 3Q17 revenue, Unisem’s headline net profit slipped by 4% qoq. This was, however, due to forex losses amounting to RM3.1m during the quarter, which we attribute to the 1.5% appreciation in the RM against the US$. Excluding the forex loss, 3Q17 core earnings grew in tandem with revenue (+5% qoq), Nevertheless, the EBITDA margin contracted 0.6ppts qoq to 23.7%, which also represents the 3rd consecutive quarter of margin compression.

9M17 Earnings Grow 28% Yoy But Below Expectations

Cumulatively, while 9M17 core earnings grew 28% yoy, this was nevertheless below expectations, accounting for 72% and 70% of our and the street’s 2017 estimates respectively. The 9M17 EBITDA margin of 24.5% is tracking slightly below our forecast while depreciation is slightly higher than expected. The company announced a second interim DPS of 3.5 sen bringing the 9M17 DPS to 7 sen (vs 9M16 DPS of 7 sen).

Maintain Sell and TP of RM3.41

The margin compression in 3Q17 reaffirms our SELL conviction on the stock. We believe that margins have gone past their peak and are likely to continue being under pressure with the appreciation of the RM. Our house view is for the RM to appreciate to RM4.10/US$ by year-end. We adjust slightly our 2017E EPS (-1.6%) post the results, but there is no change to our 12-month TP of RM3.41 (based on 14x 2018E EPS). Our 2017E-19E earnings forecasts are below consensus, largely reflecting our view of further margin compression ahead. Key risks include better-than-expected demand and a depreciation of the RM.

Source: Affin Hwang Research - 2 Nov 2017