Period

3Q15/9M15

Actual vs. Expectations

Within house but above consensus’ expectations. The group recorded 3Q15 core net profit (NP) of RM39.9m (+40% QoQ; +47% YoY), bringing 9M15 core NP to RM89.9m (+161%) which made up 77%/83% of our/consensus’ estimates. Note that the 9M15 core NP of RM89.9m has been adjusted for the non-core amounts of: (i) grant income of RM0.168m, (ii) provision for receivables and slow moving inventories totalling RM0.829m, and (iii) gain on disposal from Unisem Test (Sunnyvale) Inc, amounting to RM5.341m.

Dividends

Within expectation. A second interim tax-exempt dividend per share (DPS) of 3.0 sen (3Q15: 2.0 sen) was declared for the quarter reviewed. We are expecting another DPS of 4.0 sen (totalling to 10.0 sen / 63% of DPR) to be declared in FY15, translating into a net dividend yield of 4.3%. Key Result

Highlights

YoY, 9M15 revenue increased 21% with stellar sales recorded in all segments. In particular, Communication recorded the steepest growth, at 33% amid new major smartphone launches and 4G adoptions in China. Meanwhile, core EBIT margin leapt by 4.6ppts to 11.9% mainly helped by: (i) better product mixes with high utilisation rates in fat margin products such as Advanced packaging- wlCSP (c.85%), Leadless (c.70%) and test (c.70%) as well as (ii) favourable currency translation (USD/MYR currency improved by 16.5% from RM3.24/USD in 9M14 to RM3.78/USD in 9M15. As a result, core EBIT jumped by almost 2x to RM108.2m.

QoQ, 3Q15 revenue increased by 10% in MYR (but flat in USD terms at -0.9%) masked by favourable currency translation. Note that USD/MYR currency improved by a quantum leap of 10.9% from average RM3.66 in 2Q to average RM4.05 in 3Q. Based on our currency sensitivity analysis, every 1% strengthening of USD vs MYR will impact the bottomline by 1% from our base assumption of RM3.96/USD. On a closer look at the segmental breakdown, weakness in PC and Industrial segment was counterbalanced by robust Communication (amid new smartphone launches) and Auto (resilient demand in TPMS) segments. Meanwhile, the group’s core EBIT superseded the revenue growth by a robust 30%, suggesting better product mixes in the group’s revenue portfolio.

Outlook

Industry experts have turned more conservative by forecasting global semiconductor sales to record low-single digit growth in 2015 and 2016 (from mid-single digit growth assumption previously); with Communications and Automotive segments still being the key drivers.

Meanwhile, management is guiding for a flat QoQ top line growth in USD (a similar growth quantum in our forecasts; +0.1%); with decent growth in its Communication (amid major phones launching) and Automotive (continued demand in TPMS) to offset the softness in PC segment (power management). No guidance yet for 2016 outlook from the management.

Change to Forecasts

Post results’ quarterly numbers update, our FY15E-FY16E core NPs were marginally tweaked up by 2.5%-3.3% to account for lower effective tax rate assumption and fine tuning purposes.

Rating

Maintain MARKET PERFORM. While the group’s near-term prospects appear promising, we believe most of the positives have been priced in as the stock is already trading at FY16E PER of 12.2x which is fairly valued vs. peers thus capping its potential upside.

Valuation

Post earnings revision, our TP is marginally higher at RM2.27 (from RM2.19), based on a targeted unchanged PER of 12.0x which is broadly in line with average industry forward valuation of OSAT players in Malaysia.

Risks to our call

Higher-than-expected sales and margins.

Favourable currency exchange to the group.

Source: Kenanga Research - 30 Oct 2015