FY16 CNP of RM160.5m came in above expectations thanks to higher-than-expected forex translation. However, total DPS of 11.0 sen was in line. Management is guiding for seasonally weaker top-line growth (in USD terms) but higher YoY growth. FY17 could be a better year given the potential volume ramp up for wlCSP amidst the launching of new flagship smartphones in 2H17, to be augmented by stronger USD. All in, our TP has been raised to RM2.80 (from RM2.52) following higher sales assumption as well as stronger USD/MYR assumption. Maintain MARKET PERFORM.

Above expectations. The group recorded 4Q16 core net profit (NP) of RM50.9m (+32% QoQ, -17% YoY), bringing FY16 CNP to RM160.5m (+3%) which made up 107%/105% of our/consensus’ full-year estimates. The positive deviation was due to the higher-than-expected forex translation. As expected, a final net DPS of 4.0 sen was declared under the quarter reviewed, bringing YTD net DPS to 11.0 sen (representing 50% pay-out).

YoY, FY16 revenue increased by 5% helped by favourable currency translations. Recall that FY16 USD/MYR exchange rate improved by 6% from avg. RM3.91/USD in FY15 to avg. RM4.14/USD. However, on a fairer comparison which is in USD terms, FY16 USD revenue, in fact, dropped marginally by 1% to USD319.0m (from USD323.4m) dragged mainly by the Communication segment. Note that in FY2016, Communication segment was particularly weak as its key customers were caught with high inventory level due to sluggish smartphone demand as well as overstocked issue. Back home with the MYR currency, while adjusted EBIT grew with a similar quantum of 5%, core NP recorded a narrower growth of 3% on higher effective tax rate of 12.7%.

Meanwhile on QoQ basis, 4Q16 revenue rebounded by 13% (or +6% in USD terms), a normalisation from a weaker 3Q16. However, the group’s adjusted EBIT soared by 41%, which we believed was mainly driven by the net impact of stronger USD (with almost 100% of USD revenue after netting of the 40% USD raw material cost). Recall that 4Q16’s USD/MYR exchange rate improved by 7% from avg. RM4.05/USD in 3Q16 to avg. RM4.32/USD in 4Q16.

Outlook. Management is guiding for a weaker growth at top-line (in USD terms) given the seasonality effect. However, YoY growth is expected to be higher as management sees higher bumping and wlCSP business demand from China for Chinese smartphones application. For FY17, management is targeting to hit a low to midsingle growth (in USD terms) which we believe is possible; to be supported by the potential volume ramp up for wlCSP amidst the launching of new flagship smartphones in 2H17, alongside the resolution of the inventory overstock issue. On top of that, we also reckon that the prevailing strong USD could also augment its net exporter’s earnings profile.

Maintain MARKET PERFORM. All in, our FY17E CNP has been raised by 11% to account for higher USD/MYR assumption of RM4.40/USD coupled with higher sales assumption from Communication segment and better operational efficiency. As a result, our TP is raised to RM2.80 (from RM2.52) with an unchanged PER of 12.0x (a valuation which is broadly in line with Malaysian OSAT players). Maintain MARKET PERFORM. Risks to our call include: (i) lower-than-expected sales and margins, and (ii) adverse currency exchange to the group.

Source: Kenanga Research - 24 Feb 2017