INVESTMENT HIGHLIGHTS

• Normalised earnings continue to be adversely impact by the change in product mix

• Nonetheless, 1H18 normalised earnings came in-line with our expectation

• Lower interim dividend (2Q18: 2.5sen vs 2Q17: 3.5sen) declared in view of weaker financial performance

• Reiterate TRADING SELL with an unchanged target price of RM1.90 per share

Profit margin narrowed to single digit. Unisem (M) Bhd (Unisem) 2Q18 normalised earnings retraced by -51.6%yoy to RM20.9m. Note that we have excluded the foreign exchange gain of RM10.2m. The decrease in normalised earnings was mainly attributable to the unfavourable change in product mix (refer to table 1). The management commented that one of its customers from the MEMS segment has exited the business. Due to the change in product mix, the profit margin came in lower at 6.1% as oppose to 11.8% achieved in 2Q17.

Within expectation. Cumulatively, the group’s 1H18 normalised earnings amounted to RM37.1m (-58.0%yoy). This made up 41.0% and 34.6% of ours and consensus full year FY18 earnings estimates respectively. Nonetheless, the results came in as expected as we are expecting stronger 2H18 to made up for the shortfall in 1H18. The group indicated that it has managed to secure a new customer for the MEMs packaging segment. This is expected to improve the overall customer portfolio.

Dividend. Unisem declared first interim dividend of 2.5.sen in 2Q18. This is 1sen lower as compared to 2Q17 dividend of 3.5sen, in view of weaker financial performance during the quarter-in-review.

Target price. We are maintaining our target price of RM1.90 per share. This is premised on pegging FY19 EPS of 15.2sen against forward PER multiple of 12.5x which is the group’s 3 year historical average PER.

Reiterate TRADING SELL. Excluding the forex gain recorded in 2Q18, the recovery in its financial performance has been slow, in line with our expectation. In 2H18, we do not expectation significant change in the group’s product mix which will boost the profit margin. Moreover, the pressure from fluctuation in foreign exchange currency will affect the group’s cash balance. This, in-turn, will affect the group’s dividend payment as seen in the latest quarterly result. All factors considered, we are reiterating our TRADING SELL recommendation on the stock.

Source: MIDF Research - 3 Aug 2018