Period

2Q16/1H16

Actual vs. Expectations

Within expectations. The group reported 2Q16 core net profit (NP) of RM32.1m (-32% QoQ; +27% YoY), bringing 1H16 core NP to RM79.0m (+71%) which made up 52% of both our and the consensus’ FY16 NP estimates.

Note that the 1H16 core NP has been adjusted for: (i) deferred taxation allowance of RM12.0m following a tax incentive granted to Carsem (M), and (ii) unrealised forex losses of c.RM10.9m resulted mainly from the timing difference of billing and collection rates, all net of equity accounting.

Dividends

As expected, no dividend was declared under the quarter reviewed. Key Result

Highlights

YoY, 1H16 revenue increased by 15% with better sales contributed by all three countries’ customers. Meanwhile, headline EBIT spearheaded by 61%, which we believe to be driven by its better yielding products (such as high value-add MLP for the Smartphones/Tablets (S/T) segment and automotive MEMs sensors) coupled with lower commodity material prices and strengthening of USD against MYR. Note that USD/MYR currency improved by a quantum leap of +27.1% from average RM3.28/USD in 1H15 (2HCY14) to RM4.17/USD in 1H16 (2HCY15).

QoQ, while 2Q16 revenue (MYR) marginally dropped by 2%, sales in USD terms dropped by 6% owed mainly to lower smartphone demand in US and China as well as weaker PC sales. Coupled with the realised forex losses as a result of unfavourable hedging position, core PATAMI dropped by 32%.

Outlook

While management foresees weaker sequential revenue (USD) due to seasonality, it expects to see sales recovery in 4Q16; to be driven by new flip-chip, LGA and Cu-clip products.

Meanwhile on our take, while we forecasted weaker sales in USD terms for FY16E (-10%) and FY17E (-1%), we expect FY16E/FY17E sales in MYR terms to increase by 12%/2%, based on currency assumptions of RM4.28-RM4.40/USD for FY16-FY17.

Change to Forecasts

Post update, our FY16E-FY17E NPs were tuned down by 2%-4% as a result of minor tweak in our sales assumption (in USD terms).

Rating

Maintain MARKET PERFORM

Valuation

Post revisions, our TP has been reduced to RM9.36 (from RM9.71) based on a targeted FY16 PER of 12.0x, a valuation which is broadly in line with local OSAT players.

Risks to Our Call

Higher-than-expected sales and margins.

Industry recovery.

Further strengthening of USD vs MYR.

Source: Kenanga Research - 29 Jan 2016