FY16 CNP of RM149.9m came in within expectations. No dividend as expected. Management recently shared its strategies to navigate the softening industry outlook, which include: (i) product positioning as well as strategic exposure in different segments to buck the weak industry trend, (ii) growth potential of its Automotive segment, and (iii) sales and marketing strategies to drive revenue. No changes to our FY17E earnings pending further details from the briefing today. Maintain MP with an unchanged TP of RM7.78.

FY16 results within. With 4Q16 CNP at RM38.7m (+22% QoQ, +13% YoY), FY16 CNP of RM149.9m (+34%) came in within, making up 104%/98% of our/consensus’ full-year estimates. Note that the FY16 core NP has been adjusted for: (i) deferred taxation allowance of RM23.7m following a tax incentive granted to Carsem (M), (ii) unrealised forex losses of c.RM30.9m resulting mainly from the timing difference of billing and collection rates, (iii) insurance claims of RM16.7m by Dynacraft (incident in 1Q16), all net of equity accounting. As expected, no dividend was declared under the quarter reviewed.

YoY, FY16 revenue increased by 5% with better sales contributed by its US and European customers. Meanwhile, headline EBIT spearheaded by 28%, which was driven by the better product mix on better yielding products (such as high value-add MLP for the Smartphones/Tablets (S/T) segment and automotive MEMs sensors coupled with ongoing strengthening of USD against MYR. Note that USD/MYR currency improved by a quantum leap of 19.6% from average RM3.47/USD in FY15 to RM4.13/USD in FY16.

QoQ, despite stronger seasonality, 4Q16 revenue decreased by 2%, dragged by weaker USD vs. MYR (USD depreciated by 4% from average RM4.19/USD in 1QCY16 to average RM4.01/USD in 2QCY16). However, at the bottom line, the group’s core PATAMI grew by 22%, which we believe is helped by better product mix, better operation leveraging as well as a lower effective tax rate.

Positioning well for the weak industry trend. While management noted that 2016 and 2017 could see general weakness in the semiconductor industry as guided by industry experts, the group is confident of bucking the trend with its product positioning in strategic exposure in different segments. Note that compared to the past five years, the group has transformed itself to mainly focus on higher value-added (thus better margins) products/services (such as extremely thin MLP, WLCSP, turnkey test) and technology (such as PPak), and it has also been diversifying strategically among the cyclical (Internet of Things and Smartphone), defensive (Automotive) and modest growth (PC and Industrial) segments. While the group’s mid-term prospect appears promising, we believe the short-term positives have already been fairly priced in. Note that we are still being CONSERVATIVE on the OSAT players given their position as sub-con manufacturers in the back-end manufacturing process which are more vulnerable to sales weakness (high overhead costs with thin margins, thus with less tolerance for margin of errors).

Maintain MARKET PERFORM with an unchanged TP of RM7.78. We leave our FY17E earnings unchanged for now pending further details from the briefing today. Our TP of RM7.78 is still based on a conservative 10.5x FY17E PER, which is slightly below the group’s forward average PER. Upside risks to our call include: (i) Higher-than-expected sales and margins. (ii) Favourable currency exchange to the group

Source: Kenanga Research - 19 Aug 2016