INVESTMENT HIGHLIGHTS

• FY17 normalised earnings boosted mainly by higher sales volume and improvement in average selling prices

• Revenue from USA segment grew strongly by +24.1yoy

• Higher capital spending in FY17 to cater for growing demand of flip chip packages

• Maintain BUY with revised target price of RM4.27 per share

Double digit growth in FY17 normalised earnings. Unisem (M) Bhd’s (Unisem) 4Q17 normalised earnings decreased by -22.1% to RM36.5m. The reduction in earnings was mainly attributable to lower profit margin from the change in product mix. Cumulatively, full year FY17 normalised earnings improved by +13.6%yoy to RM168.5m. This was mainly higher production volume and improved average selling prices.

Nonetheless, the group‘s full year FY17 financial performance came in slightly below our expectation as we are assuming a too optimistic profit margin.

Revenue. Unisem’s revenue strengthened by +10.8%yoy to RM1,465.7m. This was mainly attributable to stronger demand from the industrial (+14.2%yoy) and consumer (+13.6%yoy) market segments.

Higher capital expenditure (capex) allocation. The group incurred 4Q17 capex of RM30.3m. This led to full year FY17 capex of RM165.9m, an increase of +28.1%yoy. Bulk of the capex was spent to cater for the growing demand of flip chip packages.Dividends. The group announced 4Q17 dividend of 4sen per share. This is in-tandem with the quantum of dividend announced 4Q16. Cumulatively, the group has announced full year FY17 dividend of 11sen per share.

Impact. While we maintain our FY18 revenue forecasts, we are revising our FY18 earnings assumption to RM195.7m as we are forecasting a more conservative profit margin in-line with the changes in product mix.

Target price. We roll forward our valuation base year to FY19 and derive a new target price of RM4.27 (previously RM4.58). This is premised on pegging revised FY19EPS of 28.5sen against unchanged 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 4%. All in, we are reiterating our BUY recommendation on the stock.

Source: MIDF Research - 23 Feb 2018