Unisem’s 2017 results continued to disappoint amidst margin contraction for a fourth consecutive quarter. That said, the share price is looking attractive, having declined some 30% off its recent high. However, we think that Unisem’s earnings may likely continue to surprise to the downside so long as the RM appreciation trend sustains. Moreover, near-term re-rating catalysts are absent in view of management’s guidance for weaker revenue in 1Q18. Maintain SELL with a lower target price of RM2.50.

Fourth Consecutive Quarter of Margin Contraction

Unisem reported a 16% qoq decline in core net profit in 4Q17 on the back of weaker revenue (-6.5% qoq) and a 1.1ppt qoq decline in its EBITDA margin. While the lower revenue was due to weaker sales in US$ terms (-4.2% qoq), the appreciation of the RM (-2.4% qoq) during the quarter also negatively impacted the top line. Management attributed the weaker margin to a change in product mix, although we believe that higher commodity prices are likely to have also impacted its margin. At an EBITDA margin of 22.6% in 4Q17, Unisem’s margin has contracted for the fourth consecutive quarter, largely due to the RM appreciation, and has reverted to early 2014 levels.

2017 Earnings Grow 12% Yoy But Below Expectations

Cumulatively, core earnings amounted to RM166.5m (+12.2% yoy) but fell below expectations. Earnings only accounted for 94% of our forecast largely due to the weaker-than-expected revenue and margin in 4Q17. With current negative earnings momentum and given the further appreciation of the RM ytd, we have cut our 2018-19E EPS estimates by 27% and 18% respectively. Note that management has guided for 1Q18 revenue to be flat to lower by 5% qoq. On a more positive note, a final DPS of 4 sen was announced, bringing full-year DPS to 11 sen (2016: 11 sen), broadly in line with expectations.

Maintain Sell and TP of RM2.50

With limited re-rating catalysts over the near term and compounded by a strengthening RM, we are maintaining our Sell rating on Unisem. Post the earnings cut, our target price is reduced to RM2.50 from RM3.41 based on an unchanged 14x 2018E EPS. Key upside risks include better-thanexpected demand and a depreciation of the RM.

Source: Affin Hwang Research - 23 Feb 2018