FY17 CNP missed expectations owing to adverse material costs as well as forex losses. That said, the third interim net DPS was within. Management is expecting a weaker sequential top-line growth, which we see bottom-line further aggravated by the weaker USD, mounting material costs as well as operational deleveraging. Post updates, we cut our FY18E CNP by 18% while expecting a recovery in FY19 (+9%). Maintain UP with a lower TP of RM2.45.

Below expectations. The group recorded 4Q17 core net profit (NP) of RM31.4m (-22% QoQ, -38% YoY), bringing FY17 core NP to RM157.9m (-2%) which made up 89%/91% of our/consensus’ full-year estimates. The negative deviations were due to higher-than-expected material costs and forex losses. However, a third interim net DPS of 4.0 sen came in as expected, bringing YTD total DPS to 11.0 sen.

YoY, FY17 revenue increased by 11% (or 7% in USD terms) driven by higher demand in Industrial and Consumer segments. On the other hand, sales weakness from Communication segment had widened to - 5% (from 9M17 of -2%) on lower ramp-up during the quarter. Despite stronger top-line, adjusted EBIT dropped by 4% on unfavourable product mix and further aggravated by forex losses of RM10.3m which saw adverse forex translation as well as rate conversion during the period of weakening USD. Note that this is a swing from RM13.9m forex gains in FY16, a differential of c.RM24m.

QoQ, 4Q17 revenue in MYR terms dropped by 7% (USD terms of -4%); reflecting the weaker seasonality. As a result of weaker core EBIT margin of 10.2% (-1.7ppts on higher material costs as well as lower operational efficiency) coupled with a higher effective tax rate of 11.0% (+1.2ppts), core NP dropped by a wider quantum of 22% to RM31.4m.

Still growing but at a slower pace. Though the overall industry continued to show improvement with the global semiconductor sales in December 2017 increasing by 22.5%, marking the 17th consecutive

YoY growth, we noticed the growth momentum is already moderating, mimicking the movement of the last up-cycle which lasted for 26 months back then from May 2013 to Jun 2015. While management is hopeful to match the industry growth of 6% (ex-Memory) in 2018, we believe the rising material costs, weakening USD/MYR as well as industry-wide wafer constraints would not bode well to the group’s profitability, especially in the FY18. We only expect a recovery in FY19 with the group switching its services portfolio to cater for the 12-inch wafer. Meanwhile in terms of near-term outlook, management is expecting a weaker sequential top-line growth (at nil to -5% USD sales), in which we see its bottom-line to be further eroded by weaker USD, higher material costs as well as operational deleveraging.

Maintain UNDERPERFORM with a lower TP of RM2.45 (from RM2.95). Post model update, we cut our FY18E CNP by 18% to mainly account for weaker USD/MYR assumption of RM3.90/USD and higher material costs (copper and gold). As a result, our TP has been lowered to RM2.45 from RM2.95, still based on an unchanged multiple of 12.0x FY18E PER (which is the group’s mid-cycle valuation).

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

Source: Kenanga Research - 23 Feb 2018