FY18 CNP of RM95.2m (-39% YoY) came within consensus forecast at 98% but was 8% shy of ours, mainly due to softness in the smartphone and power management segments. 4Q18 CNP fell by 27% YoY and 33% QoQ due to the same reason. A 3.0 sen dividend brought full-year dividend to 7.5 sen, below our forecast. Trim FY19E CNP by 17.1% to RM115.1m and introduce FY20E CNP of RM146.5m. Update to UNDERPERFORM with a lower TP of RM2.50.

Within consensus but missed ours. Unisem’s FY18 core net profit (CNP) of RM95.2m (-39.2% YoY) came within consensus estimate at 98% but fell 8% short of ours, mainly due to weaker-than-expected sales of leaded products amid inventory adjustments and softness in the smartphone as well as the power management segments in December. The CNP decline stemmed from a 7.8% drop in revenue, exacerbated by 6.1% depreciation in the USD/MYR given that Unisem’s revenue is c.100% USD-denominated vs. only c.40% for costs. This led to a 3.9-ppt contraction in core EBIT margin. In USD terms, revenue only inched down by 1.8%. A final dividend of 3.0 sen was recommended, bringing the full-year dividends to 7.5 sen, below our 9.0 sen forecast – in tandem with the results miss.

YoY, 4Q18 CNP dropped 26.7% on revenue decline of 7.2% (USD terms: -7.5%), again, caused by weaknesses in the smartphone and power management segments, particularly in December. Notably, management said that orders of smoke detectors were lower amid slowdown in building projects, while general charging devices used for feature phones/smartphones also saw softer demand. The quarter also saw a higher effective tax rate of 15.6% (vs. 11.0% in 4Q17).

QoQ, 4Q18 CNP fell by 33.3% on revenue dip of 6.4% (USD terms: - 8.2%) due to a combination of the same factors as above and also higher raw material costs (gold/copper +1.3%/+2.2%).

Softer quarter ahead, but long-term prospects intact. Management guided a 5-10% QoQ drop in 1Q19 revenue, partly due to sustained weakness in smartphone sales and softer car sales in China against the backdrop of a trade war. For the full year, however, management remains sanguine that revenue will grow in the low single-digit region, backed by expansion of the group's wafer bumping capacity in its Ipoh and Chengdu facilities as well as MEMS microphones packaging capacity from 3m/month to 5-10m/month by July 2019.

Trim FY19E CNP by 17.1% to RM115.1m as we lower our leaded product sales assumption by 5% and wafer-level chip-scale packaging (WLCSP) volume by 5% as well. Meanwhile, we introduce FY20E CNP of RM146.5m, driven by production ramp-up of MEMS microphones and higher wafer bumping loadings.

Update to UNDERPERFORM (from ACCEPT OFFER) with a lower TP of RM2.50 (from General Offer Price of RM3.30) based on Fwd. PER of 16.0x applied to FY19E EPS of 15.8 sen. The Fwd. PER is in line with Unisem’s mid-cycle PER. In view of a temporary slowdown in the semiconductor sector, especially in the automotive and smartphone segments, while valuation is expensive at 19.6x FY19E PER (+1.0 SD), we recommend investors to take profit.

Risks to our call include: (i) stronger-than-expected USD, (ii) fasterthan-expected adoption of 5G, and (iii) a favourable trade war outcome.

Source: Kenanga Research - 26 Feb 2019