The average 12% yoy appreciation of the RM against the US$ has negatively impacted Unisem’s 1Q18 revenue and earnings. Core earnings shrank 65% yoy as revenue contracted 11% yoy, taking along with it margins (-7.8 ppts yoy). We expect steep downgrades as the results account for only 12%/10% of our and consensus 2018 estimates. We have modelled in a 5-10% sequential improvement in revenue in 2Q18, but given our view of a strong RM, we expect 2018E earnings to contract 50% yoy and believe that risks continue to be on the downside. Maintain SELL with a lower target price of RM1.58.

1Q18 Results Well Below Expectations

Unisem registered a 1Q18 headline net profit of RM6m (-87% yoy). Excluding forex losses, 1Q18 core profit of RM16m (-65% yoy) was significantly below our and the consensus full-year estimates of RM131m and RM155m respectively. The key deviation against our forecast was the lower-than-expected EBITDA margin of 17.9% against our forecast of 23.3% for 2018. This was largely due to the weaker revenue as a result of the 12% yoy appreciation of the RM against the US$ as well as an unfavourable change in the product mix.

1Q18 Core Earnings Shrink 56% Qoq

Sequentially, 1Q18 revenue contracted 5% in US$ terms, at the lower end of management’s earlier guidance. Coupled with the RM appreciation, revenue declined 10% qoq, resulting in the sharp contraction in earnings. The EBITDA margin (at 17.9% for 1Q18) has continued to contract for the 5th consecutive quarter and is close to a 5-year low.

Maintain Sell With Lower TP of RM1.58

Despite management’s more upbeat outlook for 2Q18 (sequential revenue guidance of +5 to +10% qoq in US$ terms), we think that earnings would likely continue to be impacted by the firmer RM. We downgrade our 2018- 2020E EPS by 45%/34%/34% respectively, taking into account the weaker margins. We cut our target price to RM1.58 based on an unchanged 2018E PER of 14x, and maintain our Sell rating on Unisem. Key upside risks include better-than-expected demand and a depreciation of the RM.

Source: Affin Hwang Research - 25 Apr 2018