1H18 CNP came in within our but below consensus expectations. Absence of DPS is also as expected. We maintain our CAUTIOUS view for now in light of rising material costs, weakening USD/MYR as well as longer gestation period for its product rationalisation exercise. We leave our FY18E/FY19E earnings unchanged for now. Maintain MARKET PERFORM with an unchanged TP of RM11.30 (based on 12.0x FY19E PER).

Within our but below consensus expectations. The group reported 2Q18 CNP of RM43.3m (+17% QoQ, -21% YoY), bringing 1H18 CNP to RM80.4m (-16%) which made up 48%/44% of our/consensus full- year estimates. Meanwhile, absence of dividend is also as expected. We are expecting the group to declare a total net DPS of 27.0 sen for FY18 (similar quantum with FY17 DPS); with expectation of another 17.0 sen to be declared in 2H18 in light of the strong net cash which stood at RM547.4m (vs. RM443.8m as of FY17).

YoY, 1H18 revenue grew by 3% with robust sales in Asia (+19%) 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 Industrial’s copper clip packaging as well as higher sales from Automotive segment following growing production from its new sensors packaging. However, at the operating level, EBIT dropped by 17% on lower gross profit (GP) margin of 17.4% on higher material costs (vs. 1H17 GP margin of 19.8%) coupled with the much lower “other operating income” of RM10.0m (-43% YoY). Note that a significant swing of forex impact was observed, with losses of RM1.9m (vs. forex gains of RM14.7m in 1H17). QoQ, despite weaker currency factor of RM4.16/USD (vs. RM4.26/USD), 2Q18 MYR revenue recorded stronger growth of 2% which we believe was underpinned by better sales from the Automotive sensor. With better GP margin of 17.9% (+1.0ppts) alongside lower net operating expenses (improved by 10%), core NP improved by 17%.

Still growing but at a slower pace. Though the overall industry continued to show improvement with the global semiconductor sales in November 2017 increasing by 21.5%, marking the 16th consecutive YoY growth, we noticed the growth momentum is already moderating, mimicking the movement of last up-cycle which lasted for 26 months back then from May 2013 to Jun 2015. From our last meeting with management three months back, management noted that it is working hard towards achieving its previously guided USD-denominated top- line growth of 5.5%-7.5% in FY18 (which will outpace the industry’s growth forecast of 2.7% in 2018). That said, we prefer to be conservative (assuming only 3%-5% growth in FY18E/FY19E USD- denominated revenue) considering the gestation period which might take a few quarters to see meaningful growth. Meanwhile, another hurdle is the wafer constraints plaguing the industry.

Maintain MARKET PERFORM with an unchanged TP of RM11.30. We leave our FY18E/FY19E earnings unchanged for now pending further details from the briefing today. Maintain MP for now with an unchanged TP of RM11.30 (still based on 12.0x FY19E PER which is the group’s average 5-year forward PER)

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

Source: Kenanga Research - 30 Jan 2018