1Q19 CNP of RM5.9m (-2.4% YoY) came below both consensus and our forecasts at 5% due to lacklustre automotive and power management segments. QoQ, CNP plunged 75% partially due to seasonality and lower car sales at the start of the year. No dividend, as expected. Management guided a 5-10% sequential pickup in 2Q19 revenue. Trim FY19-20E CNP by 14-13% to RM98.6-127.7m. Maintain UNDERPERFORM with a lower TP of RM2.15.

A substantial miss. Unisem’s 1Q19 core net profit (CNP) of RM5.9m (- 2.4% YoY, -75% QoQ) came markedly below both consensus and our forecasts at 5%, mainly attributable to tighter inventory controls in the automotive industry and sustained weakness in the power management segment since December 2018. Car sales have been particularly sluggish in China, owing to the trade war, as well as in the Europe due to the introduction of the Worldwide Harmonised Light Vehicle Test Procedure (WLTP) emission regulation. For the power management segment, orders of smoke detectors were lower amid slowdown in building projects, while general charging devices used for feature phones/smartphones also saw softer demand. No dividend was announced during the quarter, as expected.

YoY, 1Q19 CNP inched down 2.4% on revenue decline of 5.7% (USD terms: -9.6%), again, caused by softness in the automotive and power management segments. This was partially cushioned by a lower effective tax rate of 14.9% (vs. 18.0% in 1Q18). QoQ, 4Q18 CNP plunged 75% on revenue dip of 8.6% (USD terms: -6.8%), partially due to seasonality – shorter working days during Chinese New Year and lower car sales in the beginning of the year. This was exacerbated by a 2% depreciation in the USD/MYR given that Unisem’s revenue is c.100% USD-denominated vs. only c.40% for costs.

Possible recovery in 2Q. Management guided a 5-10% sequential pickup in 2Q19 revenue, largely driven by higher demand for radio frequency (RF)/communications components that go into Chinese mobile phones as well as 5G network infrastructures. For the full year, we remain sanguine that Unisem’s revenue will grow in the low singledigit region despite a possible slowdown in the general semiconductor sector, backed by expansion of the group's wafer bumping capacity in its Ipoh and Chengdu facilities as well as micro-electromechanical systems (MEMS) microphones packaging capacity from 3m/month to 5- 10m/month by July 2019.

Trim FY19-20E CNP by 14-13% to RM98.6-127.7m after lowering our utilisation rate assumption from 70% to 60% for both years, reflecting lacklustre demand in the automotive and power management segments.

Maintain UNDERPERFORM with a lower TP of RM2.15 (from RM2.50) based on unchanged Fwd. PER of 16.0x applied to lower FY19E EPS of 13.5 sen (from 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 power management segments, and with valuation expensive at 18.5x 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 Apr 2019