Period  3Q13/9M13

Actual vs. Expectations The group recorded a 3Q13 normalised net loss of RM0.6m, widening the YTD losses to RM14.6m.

 The results came in below expectations, mainly deviated by: (i) the pallid sales volume amidst the ongoing products rationalisation exercises, (ii) persistent high cost structure of the group, and (iii) slower than expected fruition from the Unisem 2.0 transformation.

Dividends  No dividend was declared as expected. For the full financial year, we expect the group to declare 2.0 sen DPS, implying a 2.3% dividend yield.

Key Result Highlights YoY, 9M13 revenue decreased by 10% as the decent growth in the USA segment (+100.0% to RM20.2m) was offset by lower revenues in Asia (-11.1% to RM715.0m) and flat revenue growth in the Europe segments (0.9%

to RM8.3m). Delving deeper, the lower revenue was also due to the termination of non-profitable and ageing products in conjunction with the Unisem 2.0 transformation. On the flip side, with the rationalisation of these low-margin and unprofitable product lines, the group managed to turn around with RM2.0m earnings recorded at its EBIT level, which represented >+100% growth from a low base.

 QoQ, its 3Q13 revenue recorded flat growth of -0.1% due to the lower sales amidst the ongoing products rationalisation exercises. However, the group continued to record positive earnings at its EBIT level (RM4.2m) with higher EBIT margin of 1.7% (+0.3ppts). This was helped by the group’s continuous effort in rationalisation of certain low margin and unprofitable product lines and cost rationalisation exercises.

Outlook  While we are cautiously optimistic on the ongoing Unisem 2.0 transformation (with the main focus on the higher margin products and services), we believe its near-term outlook could continue to be overshadowed by: (i)sluggish PC demand (note that nearly 17% of the group revenue is derived from PC segment), (ii) lower sales due to the termination of non-profitable and ageing products, which caused lower revenue, and (iii) the implementation of minimum wages policy.

Change to Forecasts Our NP estimate for FY13 has now been revised down to net loss of RM12.8m (from NP of RM7.6m) after we accounted for: (i) lower demand for its leaded packaging, (ii) discontinuation of Unisem (Europe) Ltd’s operation (with an annual revenue contribution of c.1-2% to total revenue), and (iii) lower EBIT margin of 1% (from 2.9%) as a result of lower operational efficiency. Meanwhile, our FY14 NP estimate is also lowered by 11% to RM18.7m mainly on: (i) discontinuation of its Unisem Europe’s operation and (ii) lower EBIT margin of 3.5% (from 3.9%).

Rating Downgrade to UNDERPERFORM

Valuation  Inline with the earnings revision, our TP has been reduced from RM0.95 to RM0.88 based on a targeted FY14 PBV multiple of 0.59x (which is still at -1.0SD below its historical 3-year mean forward PBV).

Risks to Our Call Foreign currency exchange rate fluctuations.

 Unexpected industry recovery.

Source: Kenanga