Unisem’s stock price has rebounded from its lows, although its operational improvement is less than convincing. Revenue growth in US$ terms for 1H18 was <2% yoy, which shows it’s susceptible to further appreciation of the RM, as witnessed in the recent quarters when margins collapsed to 5-year lows in 1Q18. Near term, the stock price may continue its upward trajectory due to the softer RM and we would advocate investors SELL on strength, at least until operational growth becomes more convincing and sustainable. Management is guiding for sequential revenue growth of between +0 to +5% in US$ terms for 3Q18, although this is already in our forecast.

1H18 Core Earnings Down 57% Yoy

Unisem’s 1H18 core earnings collapsed by 57% yoy to RM37m largely due to the strength of the RM, which appreciated to an average of RM3.94/US$ for 1H18 (vs RM4.39/US$ in 1H17). As a result of lower currency translation, revenue fell 8% yoy to RM665m, contributing to the lower earnings. The 1H18 EBITDA margin contracted 6.3ppts yoy to 18.7% as a result of the weaker revenue and stubborn cost structure, although management added that unfavourable product mix was also to blame. Overall results were broadly in line with our CY18E expectations of RM83m, although they look weak compared to street’s full-year forecast of RM107m. 1H18 DPS was lower at 2.5 sen (1H17: 3.5 sen).

2Q18 Core Earnings Improve From a Low Base

Sequentially, the RM was relatively flat against the US$, depreciating by 0.6% qoq. Nevertheless, 2Q18 revenue was up 7%, consistent with management’s sequential revenue guidance of +5 to +10% qoq in US$ terms for the quarter. This was the key driver behind the 32% sequential improvement in core earnings. Its 2Q18 EBITDA margin improved 1.6ppts qoq to 19.5% on improved operating leverage.

Maintain Sell, TP Raised to RM1.83

We maintain our Sell rating on Unisem but raise our target price to RM1.83 (from RM1.58) as we roll forward our valuation horizon to CY19E (still based on an unchanged PER of 14x). Our valuation for Unisem remains below the sector average largely to reflect Unisem’s more inferior ROEs compared to the sector. Key risks to our call include a sharp depreciation of the RM, which will positively impact earnings, and also increased outsourcing opportunities as a result of a higher cost of production arising from the USChina trade war.

Source: Affin Hwang Research - 3 Aug 2018