Unisem’s 1H19 core profit nearly halved yoy to RM19m and was well below expectations. While there was an improvement qoq, partially due to the low base in 1Q19, earnings remained relatively weak. Revenue growth disappointed, largely impacted by the inventory adjustment with weaker contribution across the auto, industrial and communication segments. Given the lack of near-term catalysts and potential downside risk to earnings as the trade tensions escalate, we are maintaining our Sell rating with a lower TP of RM1.77 (based on an unchanged 15x on 2020E EPS).

1H19 Earnings Weaker Yoy, Below Expectations

1H19 core profit of RM19m was below expectations, accounting for only 21- 24% of our and the street’s full-year expectations. The earnings miss was largely due to weaker-than-expected revenue, as management guided that their customers were impacted by the Huawei ban. While the ban has been “lifted”, management guided that demand remains soft and has not reverted to pre-ban levels. Management currently expects 3Q19 to be flat at best and remains cautious for 2H19.

2Q19 Core Earnings Jumped 30% Qoq

Earnings jumped 30% qoq from the low base in 1Q19. The improvement was driven by EBITDA margin enhancement (+1.8ppts qoq) likely due to a favourable product mix while revenue grew at a slower 2.9% qoq, below management’s earlier guidance.

Maintain SELL With Lower TP of RM1.77

We cut our earnings forecasts by 12-29% to reflect the earnings disappointment. While our 2019 earnings forecast implies earnings improvement in subsequent quarters, we are still projecting earnings to be weaker for the full year, as we expect the trade tensions to negatively affect its utilisation and growth over the near term. We maintain our Sell rating on Unisem with a lower target price of RM1.77, based on an unchanged 5-year mean PE of 15x on the 2020E EPS. Valuations remain expensive while risk to earnings remains to the downside as the global economic growth engine falters. Key upside risks: a sharp depreciation of the RM, which will positively impact earnings, increased outsourcing opportunities, and shareholder Huatian Technology transferring some of its business to Unisem.

Source: Affin Hwang Research - 7 Aug 2019