We came away feeling more POSITIVE premised on the group’s strategic plans to buck the industry weakness with growing its Automotive segment; as showcased in its latest quarterly results. Post meeting, we imputed a higher USD/MYR assumption of RM4.40/USD alongside marginally higher sales assumption from Automotive segment and better operational efficiency, leading to an upgrade of +13%/+8% in our FY17E/18E CNP. Upgrade to OP from MP with a higher TP of RM10.20 (based on 12.0x FY18E PER).

Further details on 2QFY17 results. On a closer look at the group’s financials in USD terms, which are more reflective of the operational performance, 2Q17 revenue improved by 5% sequentially (with utilisation rate of slightly better than c.75%), bucking the seasonally weaker quarter. This was on the back of better sales from Automotive electronics and power management chips. Notably, in terms of revenue breakdown, Smartphone segment recovered by 2ppts from lower base last quarter. Meanwhile on geographical segment, Europe sales led with a jump of 18% YoY driven by growing demand from Server farm and Automotive businesses.

Plans to outgrow the industry over 2-year plan. Management noted that while 2017 could continue to see general weakness in the semiconductor industry, a view which is shared by us, the group should outperform industry weakness on this 2-year span, mainly on the back of steady pick-up from its Automotive segment. We believe this is possible as we understand that the group’s leading Automotive technologies that are used for safety features (such as advanced package for pressures, magnetic, acceleration sensors), have already passed the stringent qualification stage and will see more meaningful earnings fruition in the next two/three quarters. Meanwhile, management noted that they are also finding ways to increase its exposure in the Automotive segment, of which they do not discount the possibility of merger/acquisition. Meanwhile looking beyond the perspective of product portfolio, management noted that it is also adopting the customer-centric strategy whereby the group has already developed the roadmap to capture the emerging key trends, all on the back of its advanced technologies, strategic customers/accounts planning, geographical exposure as well as competitive advantages.

On 3Q17 outlook, management mentioned that the general prospect is “challenging”, citing that it will work hard to buck the seasonally weaker trend. While no growth quantum was guided, we are of the view that the USD sales should be weaker sequentially (on -5% growth assumption) given the slow seasonality as well as higher base in 2Q17. That said, we are expecting 3Q17 sales in MYR terms to fare better by +11% YoY on the back of better Automotive sales as well as favourable forex (average assumption of RM4.40/USD from RM4.19/USD in 3Q16, +5% YoY).

Our take post meeting. Post our model update with higher USD/MYR assumption of RM4.40/USD coupled with marginally higher sales assumption from Automotive segment and better operational efficiency, we raise our FY17E/FY18E CNP by +13%/+8%. We also roll over our valuation base year to FY18, leading to an upgrade to TP of RM10.20 from RM8.88. This is still based on a conservative 12.0x FY18E PER, (a valuation which is broadly in line with Malaysian OSAT players). Upgrade to OP from MP. Risks to our call include: (i) Lower-than-expected sales and margins, and (ii) Unfavourable currency exchange to the group.

Source: Kenanga Research - 27 Jan 2017