Period

1Q16/3M16

Actual vs. Expectations

Within expectations. The group recorded 1Q16 core net profit (NP) of RM34.7m (-44% QoQ; +61% YoY) which made up 24% of both our and the consensus’ full-year estimates.

Dividends

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

Highlights

YoY, 1Q16 revenue increased by 14% with stellar sales recorded in all segments. In particular, PC and Automotive rebounded from a low base in 1Q15 with both registering the steepest growth of 21%. Meanwhile, core EBIT margin increased by 2.7ppts to 12.4% mainly helped by: (i) better product mixes with high utilisation rates in fat margin products such as Advanced packaging- wlCSP and testing as well as (ii) favourable currency translation (USD/MYR currency improved by 16% from avg.RM3.62/USD in 1QCY15 to avg.RM4.19/USD in 1QCY16). As a result, core EBIT leaped by 45% to register RM39.5m.

QoQ, 1Q16 revenue dropped by 10% amid seasonality weakness (shorter working quarter and inventory adjustment). With lower operational efficiency aggravated by weaker USD vs MYR (USD depreciated by 2.1% against MYR from average RM4.28 in 4QCY15 to average RM4.19 in 1QCY16), core NP declined by 44%.

Outlook

Management is guiding for a rebound sequentially at its top line (of 5-10% in USD terms) on the back of higher demand for its advanced packaging (wlCSP and MIS packages) for Smartphone applications, which we think is achievable (vs. our assumption is +6.6%) amid the major launches of several flagship smartphone models.

However, we believe that the earnings improvement in MYR terms will not be evident given the adverse currency fluctuations, of which the MTD USD/MYR currency is averaging at RM3.90/USD, vis-à-vis 1Q16’s RM4.19/USD, a drop of 7%.

Meanwhile, we are also cognisant of the weaker earnings guidance recently from the major smartphone components vendors (of which some are also the customers for UNISEM). Coupled with the limited earnings visibility, we are maintaining our CONSERVATIVE stance on the OSAT players given their position as sub-con manufacturers in the back-end manufacturing process which are more vulnerable to the sales weakness (thin margins, thus with lesser tolerance for margin of errors).

Note that we have already imputed a conservative forecast for its FY16E and FY17E NPs previously with growth of -7% and -6%, respectively.

Change to Forecasts

While there are no changes in our earnings drivers, our FY16E-FY17E NP have been marginally tweaked by +3% post model updates.

Rating

Maintain MARKET PERFORM as the decent dividend yield is a saving grace.

Valuation

Recall that we have already rollover our valuation base year from FY16E to FY17E in our latest sector report, titled: Inflection point published on 6th Apr 2016. With a lower targeted PER of 10.5x ascribed, a valuation which is broadly in line with OSAT players (previously at 12.0x) in Malaysia, our new TP is now RM2.10 (from RM2.28 previously).

Risks to our call

Upside risks :

Higher-than-expected sales and margins.

Favourable currency exchange to the group.

Source: Kenanga Research - 27 Apr 2016