1Q17 CNP of RM39.7m came in within expectations. As expected, a first interim dividend of 8.0 sen was declared. While management had previously 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 product positioning in strategic exposure in different segments. No changes to our FY17E-FY18E earnings for now. Maintain MP with an unchanged TP of RM8.48.

1Q17 results within. The group reported 1Q17 CNP of RM39.7m (+3% QoQ, -15% YoY) which made up 29%/27% of our/consensus’ full-year estimates. We deemed the results to be within expectations as the 1Q (or 3QCY) typically is a seasonally stronger quarter for the group (recall that 1Q16 made up 31% of FY16 CNP). As expected, a first interim dividend of 8.0 sen was declared for the quarter under review. We are expecting the group to declare total DPS of 23.0 sen (33% DPR).

YoY, 1Q17 revenue decreased by 7% with weaker sales seen from its Asia and USA customers. In terms of products segmentation, the main culprit was the Smartphone segment where we believe its respective key customers were still holding high level of inventory in their stockpiles (thus leading to slower demand); similar to that other OSAT players which are also competing in the same space. With lower operational efficiency as well as unfavourable product mix, EBIT dropped by 12%. QoQ, 1Q17 revenue improved by 4% on the back of stronger seasonality. While EBIT improved by 15% on the back of stronger USD vs. MYR (USD appreciated by 1% to average RM4.05/USD in 3QCY16) as well as better operational leveraging, the gains were wiped out at the bottom line level with CNP only inched up by 3% on a higher effective tax rate in the quarter.

Embracing for the weak industry trend. While management has previously 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 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 RM8.48. We leave our FY17E-FY18E earnings estimates unchanged for now. Our TP of RM8.48 is still based on a conservative 12.0x FY17E PER, (a valuation broadly in line with Malaysian OSAT players). Risks to our call include: (i) higher-than-expected sales and margins, and (ii) favourable currency exchange to the group.

Source: Kenanga Research - 10 Nov 2016