• 1HFY17 normalised earnings amounted to RM86.3m, in-line with ours and consensus expectations

• Frontload capex of RM112.3m for 1HFY17 mainly to cater for higher demand of flip chip packages

• Declared 2QFY17 dividend of 3.5sen

• Maintain BUY with higher target price of RM4.58 per share

Within expectations. Unisem (M) Bhd’s (Unisem) 2QFY17 normalised earnings is up by +23.1%yoy to RM41.1m. This is mainly driven by improvement in revenue contribution mainly from the industrial (+49.0%yoy), consumer (+28.8%yoy) and PC (+14.0%yoy) market segments. These lifted the group’s 1HFY17 normalised earnings by +28.0%yoy to RM86.3m from RM67.4m a year earlier. All in, the group’s 1HFY17 financial performance came in within ours and consensus expectations, accounting for 47.9% and 46.6% of FY17 full year earnings estimates.

Capital expenditure (capex) taper off in 2HFY17. 2QFY17 capital spending accelerated by +46.8%yoy to RM41.1m. This raised the group’s 1HFY17 capex to RM112.3m (+46.8%yoy) from RM76.5m as at 1H16. Higher capex was utilised to meet the rising demand of flip chip packages. The number of flip chip bonder machine is expected to increase by approximately +35%yoy to 73 units by end of 2017 (4Q16: 54 units). Nonetheless, based on the capex-to-EBITDA ratio guidance of approximately 45%, we expect 2HFY17 capex to fall within the range of RM50m to RM60m.

Healthy net cash balance. Despite heavy capital spending in 1HFY17, the group’s net cash balance improved significantly to RM65.8m from RM23.2m as at 1HFY16, an increase of +183.6%yoy. We expect the net cash position to improve further in 2HFY17 driven by higher earnings expectations as well as lower capital spending.

Dividends. The group announced 2QFY17 dividend of 3.5sen per share. This is in-tandem with the quantum of dividend announced in 2QFY16. We suspect that the group may be conserving cash in anticipation of more intense capex requirement from FY18 onwards.

Impact on earnings. We are fine-tuning our FY17 earnings estimates slightly higher by +1.9%yoy, while raising our FY18 earnings estimates by +12.9%yoy. We are assuming higher revenue contribution, mainly from the industrial and consumer segment. Furthermore, we are now expecting the Batam plant to turn profitable in FY18.

Target price. Following our earnings upgrade, we derive a higher target price of RM4.58 per share (previously RM3.91). This is premised on pegging revised FY18EPs of 30.5sen against forward PER multiple of 15x.

Maintain BUY. Since the positive turnaround in 2014, the group’s operating profit has been growing at a steady pace. We believe the group is placing more emphasis in the provision of products and services which command better profit margin to maintain the growth momentum. We understand that the group has managed to win new orders for application in rental-bike systems, microphones and memory power management. In addition, we also expect healthy demand from automotive segment to push the financial performance of Batam’s plant into the positive territory in 2018. On another note, due to its healthy net cash balance, we expect dividend yield to remain satisfactory at approximately 3%. All in, we are reiterating our BUY recommendation on the stock.

Source: MIDF Research - 9 Aug 2017