1H17 CNP came in line and so was the first interim net DPS of 3.5 sen. Management is expecting stronger USD sales QoQ with higher orders demand in all segments. Meanwhile, the loss-making Batam plant is also seeing higher activities in conjunction with the industry up-cycle. All in, our FY18E earnings have been increased by 8% to account for higher utilisation in Batam plant, which is also expected to yield better operation efficiency. Maintain MP with a higher TP of RM3.85.
Within expectations. The group recorded 2Q17 core net profit (NP) of RM38.9m (-13% QoQ, +5% YoY), bringing 1H17 core NP to RM83.9m (+17%) which made up 49%/45% of our/consensus full-year estimates. As expected, a first interim net DPS of 3.5 sen was declared under the quarter reviewed. We are expecting the group to declare a total net DPS of 11.0 sen for the year.
YoY, 1H17 revenue increased by 14% (or 6% in USD terms) driven by higher demand in Industrial and Consumer segments. On the other hand, sales from Communication segment still remained soft as we understand that the major volume ramp up for the segment’s packages will only be seen in the 2H17 in conjunction with the launching of new flagship US smartphones. At the operational level, adjusted EBIT improved by 19% on better product mixes, further augmented by stronger USD vs MYR. Note that USD strengthened by 7% from average RM4.10/USD to average RM4.39/USD in 1H17.
Meanwhile on QoQ basis, despite stronger USD revenue growth of 6%, 1Q17 revenue in MYR terms recorded a flat growth of 2% on weaker USD vs MYR. Coupled with the unfavorable product mixes (lesser contribution from higher margin wlCSP and testing), adjusted EBIT dropped by 12%.
Poised well to capture the high wave. The overall industry continues to show improvement as the global semiconductor sales in June 2017 increased by 23.6%, marking the eleventh consecutive YoY growth which is still showing uptrend momentum. Management is expecting a stronger sequential growth which we believe is highly possible; to be supported by the potential volume ramp up for wlCSP amidst the launching of new flagship smartphones in 2H17. Beyond that, management has also planned investment in new Fan-Out WLP lines by end of this year. While no capex was mentioned for the new investment, we understand that the earnings contribution could only be seen as early as 2H18. We also noted that its loss-making Batam plant is currently seeing higher activities in conjunction of industry up-cycle. The Batam had previously contributed losses of c.RM26m in FY16.
Maintain MARKET PERFORM with a higher TP of RM3.85. Post model update, our FY17E earnings have been marginally tweaked up by 2% for house-keeping purposes. While no major changes were made to our FY17E earnings assumption, our FY18E earnings have been increased by 8% to account for higher utilisation in Batam plant of which we also expect better operation efficiency yield. Our new TP of RM3.85 from RM3.55 is still based on an unchanged multiple of 15.0x (being the up-cycle valuation) on FY18E EPS. Risks to our call include: (i) lower-than-expected sales and margins, and (ii) adverse currency exchange to the group.
Source: Kenanga Research - 9 Aug 2017
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