1Q18 CNP missed expectations owing to unfavourable product mix as well as huge forex losses. However, absence of DPS was expected. While sales should come in stronger in 2H18, we believe rising material costs, weak USD/MYR as well as industry-wide wafer constraints do not bode well for the Group, especially in FY18. Post updates, we cut our FY18E/FY19E CNP by 24%/9%. Maintain UP with a lower TP of RM1.55.

Below expectations. While the group revenue met expectations (at 23% of both our/consensus’ numbers), 1Q18 core net profit (NP) of RM6.0m missed (-81% QoQ, -87% YoY), which merely made up 4%/3% of our/consensus’ full-year estimates. The negative deviations were due to unfavourable product mix, aggravated by higher-than- expected material costs and huge forex losses. Meanwhile, absence of DPS was as expected.

YoY, 1Q18 revenue dropped 10% in MYR terms (but up 1% in USD terms) on adverse currency translations. Note that USD/MYR averaged at RM3.92/USD in 1Q18, vs. RM4.45/USD in 1Q17, which was a swing of 12%. In terms of products breakdown (in USD terms); while industrial grew by 8% on higher Automation contribution, Communication, Consumer and Automotive segment reported meager growth of 1%, with further drag from PC (-5%) on lower demand of LCD panels. At operational level, EBIT dropped further by 84% on higher material costs (i.e. copper/gold increased by +20%/+9%), aggravated by forex losses of RM9.9m (vs. forex losses of RM0.3m).

QoQ, 1Q18 revenue in MYR terms dropped by 10% (USD terms by - 5%); on weaker seasonality. As a result of much weaker core EBIT margin of 2.6% (-7.6ppts on lower operational efficiency and adverse product mixes) coupled with weaker USD (averaged at RM3.92/USD vs. RM4.16/USD in 4Q17), core NP dropped by a wider quantum of 81% to RM6.0m.

Moderate industry growth. Though the overall industry continued to show improvement with the global semiconductor sales in March 2018 increasing by 21.0%, marking the 20th consecutive YoY growth, the growth momentum continued to moderate, 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 9% (ex-Memory) in 2018, we believe rising material costs, weakening USD/MYR as well as industry-wide wafer constraints do not bode well to the group’s profitability, especially in FY18. We only expect a recovery in FY19, should the new expansion of Unisem Advanced Technologies (UAT) 12-inch bumping capacity is on track. Meanwhile in terms of near-term outlook, management is expecting a stronger sequential top-line growth (at +5% to +10% USD sales) to be supported by IoT, Power Management and Automotive sales.

Maintain UNDERPERFORM with a lower TP of RM1.55 (from RM2.05). Post model update, we cut our FY18E/FY19E CNP by 24%/9% to account for higher raw material costs and unfavourable product mix. As a result, our TP has been lowered to RM1.55 from RM2.05, still based on an unchanged multiple of 10.0x 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 - 25 Apr 2018