Unisem’s 2018 core net profit, down 47% yoy, was impacted by lower revenue and margin compression. The results were nevertheless within our expectations. All eyes are now on the potential synergies that the new shareholder, Tianshui Huatian, can bring to the group. Expectations are high considering the US-China trade tensions. However, trading at 23x 2019E PER, we think that any near term upside has already been priced in. Downgrade to Sell

2018 Core Net Profit Declines 47% Yoy – Within Expectations

Unisem’s 2018 core net profit fell by 47% yoy to RM89m on the back of weaker revenue (-8% yoy) and a contraction in EBITDA margin (-4.4ppts yoy to 19.7%). This was largely due to weaker sales (-1.8% yoy in US$ terms) and negative impact from the stronger RM and unfavourable product mix. Overall results were in line with our expectations but 10% below street’s expectation. However, 2018 DPS of 7.5sen (2017: 11sen) was below our expectation.

4Q18 Core Profit Declines 15% Qoq

Sequentially, 4Q18 revenue shrank 6.5% qoq. This was below management’s earlier guidance of sequential growth of between 0-5% citing a sharp slowdown in December on inventory adjustments and weak smartphone demand. Management has guided for 1Q19 revenue to decline by 5-10% qoq.

Downgrade to SELL, TP Cut to RM2.06

We raise our 2019-20E EPS by 5-18%, updating our key assumptions after the full-year results. Despite our earnings upgrade, Unisem’s valuations are not attractive, in our view, trading at 23x 2019E PER or >+1SD above its 5- year mean. With the takeover by management and Tianshui Huatian Group completed, focus should return to earnings delivery and valuations. We believe that investors expectations are high and expect the new shareholder to contribute meaningfully to earnings over the near term. Meanwhile, there may also be a share price overhang as the company tries to address its free float of less than 25%. Bursa has granted the company an extension till 1 July 2019 to resolve this issue. Downgrade to SELL (from Hold) with a lower TP of RM2.06 (based on 5-year average PER of 15x on 2019E EPS). Key upside risks: a sharp depreciation of the RM which will positively impact earnings and increased outsourcing opportunities.

Source: Affin Hwang Research - 26 Feb 2019