While 1QFY18 revenue and DPS came in within expectations, CNP marginally missed which we believe was dragged by higher-than-expected material costs, effective tax rate (ETR) as well as higher forex losses. We leave our FY18E/FY19E earnings unchanged for now (with downside bias) pending further details from the briefing today. Maintain OP for now with an unchanged TP of RM15.70.

1QFY18 results below. The group reported 1Q18 CNP of RM37.1m (- 9% QoQ, -7% YoY), which made up 19% of our/consensus’ full-year estimates. While revenue came in within expectation, bottom-line came in marginally below which we believe was dragged by a combination of: (i) lower-than-expected margins from higher material costs, (ii) higher-than-expected effective tax rate, arising from overseas segment as well as (iii) higher forex losses. That said, a first interim dividend of 10.0 sen came in within expectation. We are expecting the group to declare a total net DPS of 27.0 sen for FY18.

YoY, 1QFY18 revenue grew by 8% with robust sales in Asia (+25%) offsetting the weakness in USA and Europe segments. While we have yet to obtain the detailed breakdown in terms of market segments, we believe that the higher overall sales were predominantly driven by the continuous strong sales in the Smartphone segment amid the recent flagship smartphone launchings as evidenced in 9MCY17 as well as higher sales from Automotive segment following the growing production from its new sensors packaging. At the operating level, while gross profit registered 4% growth, EBIT dropped by 5% due to much lower “other operating income” of RM4.1m (-54%) on meaningful swing of forex impact with losses of RM2.3m (vs forex gains of RM6.5m). Coupled with higher ETR of 16.7% (vs 11.1% in 1QFY16), core PATAMI dropped by 7%. QoQ, despite USD revenue growth of 1%, 4Q17 MYR revenue recorded weaker growth of -1% on weaker USD vs MYR. With higher ETR, core NP dropped by 9%.

Realigning portfolios to capture growth. The overall industry continued to show improvement as the global semiconductor sales in September 2017 increased by 22.2%, marking the fourteenth consecutive YoY growth. Management is looking at a more optimistic top-line growth in USD terms of 5.5-7.5% in FY18, which will be driven by new products and strategic positioning in both high growth (Communication) and defensive (Automotive and Industry) segments. We believe this is highly possible considering the new products roadmap (advance packaging and testing, new thermal materials); not to mention the commencement of production for advanced sensors starting from 3Q17 that had already passed the stringent qualification stage. Besides top-line growth strategy, the group is also investing in higher automation (with better yield and higher efficiency), which will eventually evolve into Industrial 4.0.

Maintain OUTPERFORM with an unchanged TP of RM15.70. We leave our FY18E/FY19E earnings unchanged for now (with downside bias) pending further details from the briefing today. Maintain OP for now with an unchanged TP of RM15.70 (based on 15.0x FY18E PER).

Risks to our call include: (i) Lower-than-expected sales and margins. (ii) Unfavourable currency exchange to the group.

Source: Kenanga Research - 9 Nov 2017