Unisem’s 9M18 results remained lacklustre – core earnings of RM64m (-51% yoy) were broadly within our and street expectations, impacted by a stronger Ringgit. Nevertheless, the weak set of results is likely to take a back seat to the on-going voluntary conditional takeover offer by its Chairman and Taiwan listed Tianshui Huatian Technology Co. Unisem’s share price should remain supported by the RM3.30 offer price which we deem attractive for minority shareholders. The latter also forms the basis for our TP revision and stock rating upgrade.

9M18 Core Earnings Down 51% Yoy

Unisem’s 9M18 core earnings fell by 51% yoy to RM64m on the back of weaker revenue (-8% yoy) and a contraction in the EBITDA margin (-5.2ppts yoy to 19.3%). This was largely due to the negative impact of the stronger RM vs. the US$ as well as an unfavourable product mix and higher raw material costs. The overall earnings were broadly in line with expectations, accounting for 77% of our full-year forecast but 65% of the consensus.

3Q18 Core Earnings Improved 28% Qoq

Sequentially, 3Q18 revenue grew in tandem with management’s guidance of 0-5% growth. Aided by a weaker RM, Unisem posted a 28% qoq growth in earnings, albeit from a low base in 2Q18. The 3Q18 EBITDA margin improved 0.86ppts qoq to 20.3% on an improved operating leverage.

Upgrade to HOLD, TP Raised to RM3.30

To reflect the ongoing takeover offer, our rating for the stock is raised to HOLD (from a Sell) and TP lifted to RM3.30 (based on the offer price). We note that an arbitrage opportunity has been present since the deal was first announced in mid-Sept18. The stock price has not traded anywhere close to the offer price possibly due to concerns that the deal may fall thorugh. If so, our fundamental fair value for the stock would be unchanged at RM1.83 (based on a PER of 14x on CY19E EPS). Key risks to our call include the takeover offer falling through, a sharp appreciation/depreciation of the RM which will negatively/positively impact earnings, and increased outsourcing opportunities as a result of a higher cost of production arising from the USChina trade war.

Source: Affin Hwang Research - 2 Nov 2018