INVESTMENT HIGHLIGHTS

• The group’s financial performance continues to be negatively impacted by the unfavourable product mix

• Cumulative 9MFY18 normalised earnings came in weaker (-58.0%yoy), in-line with our expectation

• Lower interim dividend (3Q18: 2.0sen vs 3Q17:3.5sen) declared in view of weaker financial performance

• Reiterate our recommendation to accept offer and shift focus to its listed peers who offer better earnings quality

Yet to achieve double digit profit margins. Unisem (M) Bhd (Unisem) 3QFY18 normalised earnings retraced by -37.8%yoy to RM27.1m. The decrease in normalised earnings was mainly attributable to unfavourable change in product mix. This has also led to lower profit margin of 7.9% as oppose to 11.4% achieved in 3QFY17.

Within expectation. Cumulatively, the group’s 9MFY18 normalised earnings amounted to RM37.1m. This translates into a decrease of 58.0%yoy. The financial results came in within ours but below consensus expectations, accounting for 70.9% and 59.4% of ours and consensus full year FY18 earnings estimates respectively.

Impact on earnings. No change to our earnings estimates at this juncture.

Dividend. Unisem declared first interim dividend of 2.0sen in 3Q18. This is 1.5sen lower as compared to 3Q17 dividend of 3.5sen, in view of weaker financial performance during the quarter-in-review. Cumulatively, for 9MFY18 the group declared dividend of 4.5sen.

Accept Offer. On a year-to-date basis, the share has underperformed. We believe that the decline was premised on Unisem’s unfavourable product mix which has negatively impacted its 1HFY18 normalised earnings (-58.0%yoy) as well as depreciation of the USD/MYR exchange rates. In view of this, we previously had a trading sell recommendation on the stock. We view that this had led the chairman to seek a strong Chinese partner to boost Unisem’s business, especially its Chengdu operation in China. Thus, the takeover offer represents an opportunity for investor to exit the company and shift focus to other listed semiconductor companies which offer better earnings quality.

Moreover, due to the weak financial performance, dividend declared is also less attractive. We opine that dividend yield to decline below three percent in the foreseeable term. All factors considered, we are recommending investors to accept the takeover offer.

Source: MIDF Research - 2 Nov 2018