INVESTMENT HIGHLIGHTS

• Worst-than-expected 1Q18 financial performance mainly attributable to unfavourable exchange rate
• Lower capital spending in 1Q18 (-36.6%yoy), concentrating on the areas of IOT and power management
• Do not expect significant recovery in the immediate term
• Downgrade to TRADING SELL with a revised target price of RM1.90 per share

Severely below expectations. Unisem (M) Bhd’s (Unisem) 1Q18 normalised earnings plunged by -65.6%yoy to RM 15.6m. The reduction in earnings was mainly attributable to the depreciation of USD/MYR exchange rate as compared to the prevailing rate in the corresponding quarter a year ago. Note that in USD terms, the revenue recorded a marginal growth of +1.1%yoy. Meanwhile, the operating expenses remain elevated as the bulk of the cost is denominated in Ringgit. There is also an upward adjustment in labour cost during the quarter-in-review.

All in, the group‘s 1Q18 financial performance came in severely below our and consensus expectations, accounting for 8.2% and 10.3% of full year FY18 earnings estimates respectively.

Higher capital expenditure (capex) allocation. The group incurred 1Q18 capex of RM45.1m. This represents a decrease of -36.6%yoy. Bulk of the capex was spent on wirebonders and tester/handlers for IOT and power management manufacturing lines.

Impact on earnings. We are imputing lower revenue contribution across all segments and reduce our profit margin assumption to account for the increase in labour cost. All factors considered, we are cutting FY18 and FY19 earnings estimates by -52.4% and -46.5% respectively.

Dividend. Due to the downward revision in Unisem’s FY18 and FY19 earnings estimates, we are also trimming our dividend estimates for both year to 7.0sen and 8.0sen respectively.

Target price. We are deriving a new target price of RM1.90 per share (previously RM4.27). This is premised on pegging FY19EPS of 15.2sen against forward PER multiple of 12.5x which is the group’s 3 year historical average PER. Note that we are updating our forward PER from 15x previously. This is to account for the uncertainty emanating from the US-China trade war and the global slowdown in demand of smart devices.

Downgrade to TRADING SELL. The first quarter is historically the weakest quarter. However, the unfavourable exchange rate has unexpectedly put more pressure on the group’s earnings. While we expect production to pick up pace towards 2H18, we expect the earnings upside is rather limited as Ringgit remain steady below RM4.00. Furthermore, we do not expect significant cost savings should the group step up its cost saving initiatives. The weak earnings outlook is also expected to limit the group’s ability to payout attractive dividend. All factors considered, we are downgrading our stock recommendation to TRADING SELL from buy previously.

Source: MIDF Research - 25 Apr 2018