While 1H18 CNP came in line, the interim DPS of 2.5 sen was a miss. Management expects 3Q18 sales to grow sequentially, underpinned by IoT, Power Management and Automotive sales. We only expect a meaningful recovery in FY19 post commencement of new UAT Bumping Fab in 1Q19. We tweaked our FY18E/FY19E CNP by +1%/+2% for house-keeping purposes. Maintain MP with a higher TP of RM2.65 (from RM2.60, still based on 13.0x FY19E PER).

Within expectations. A solid 2Q18 core net profit (CNP) of RM30.9m (+415% QoQ, -20% YoY) was reported, bringing 1H18 CNP to RM36.9m (-56%) which made up 33%/34% of our/consensus’ full-year estimates. We deemed the results to be within expectations as typically the financial 3Q and 4Q will see better earnings on higher seasonal ramp-up amid new flagship Smartphone launching. Note that over the past three years, six-month CNP made up only 33%-54% of full-year numbers. That said, the interim DPS of 2.5 sen was a miss from our expected 3.5 sen.

YoY, 1H18 revenue dropped 8% in MYR terms (but up 3% in USD terms) on adverse currency translations. Note that USD/MYR averaged at RM3.94/USD in 1H18 vs. RM4.39/USD in 1H17, which was a swing of 11%. In terms of products breakdown (in USD terms); while Automotive and Consumer took the lead with 5% growth (higher complexity in semiconductor content), PC continued to see weakness (- 5%) on lower demand of LCD panels. Meanwhile, Communication and Industrial segments remained flat at +2%. At operational level, EBIT dropped further by 54% on higher material costs (i.e. copper/gold increased by +20%/+6%) and higher ETR of 15% (vs. 11% in 1H17).

QoQ, 2Q18 revenue in MYR terms increased 7% (USD terms by +6%, within management’s guidance) on stronger seasonality anchored by better growth quantum in Communication and Consumer segments. As a result of much stronger core EBIT margin of 10.7% (+8.1ppt on better operational efficiency and forex gains of RM10.0m vs. losses of RM10.0m in 1Q18) alongside lower ETR of 14.2% (vs. 18.0%), core NP jumped four fold to RM30.9m. Note that this is within the range of the past three years’ normalised earnings level of RM28m-RM39m.

Investing for future growth. For 3Q18, management is expecting a sequential top-line growth (flat to +5% USD sales) to be supported by IoT, Power Management and Automotive sales. Though 2H18 sales are typically supported by high margin packaging from Communication segment, we understand that there is still some inventory overhang; hence, limiting substantial revenue jump from here. Moreover, rising material costs as well as relatively weaker USD/MYR do not bode well for the group’s profitability. We only expect a recovery in FY19, should the new expansion of Unisem Advanced Technologies (UAT) 12-inch bumping capacity is on track for full commencement in 1Q19.

Maintain MARKET PERFORM with a higher TP of RM2.65 (from RM2.60). Post model updates, we tweaked FY18E/FY19E CNP by 1%/2% for house-keeping purposes. As a result, our TP is raised marginally to RM2.65, still based on an unchanged multiple of 13.0x FY19E PER (based on its 3-year forward average PER, which is also in line with the mid-tier OSAT 3-year average forward PER). Risks to our call include: (i) lower-than-expected sales and margins, and (ii) unfavourable currency exchange to the group.

Source: Kenanga Research - 3 Aug 2018