INVESTMENT HIGHLIGHTS

• Lower 4QFY18 normalised earnings of RM22.6m pulled down full year FY18 normalised to RM86.2m (-48.0%yoy)

• The underperformance came in within ours but below consensus expectation

• Full year FY18 dividend reduced to 7.5sen (FY17: 11sen), in-line with the weaker financial performance

• Revert our recommendation to NEUTRAL with a target price of RM2.70

Lower sales volume. Unisem (M) Bhd (Unisem) 4QFY18 normalised earnings reduced by -38.0%yoy to RM22.6m. The reduction in earnings was mainly attributable to the decrease in sales volume which translates into a -7.2%yoy reduction in revenue to RM331.8m.

Within expectation. The weaker 4QFY18 led to lower full year FY18 normalised earnings of RM86.2m (-48.0%yoy). All in, Unisem’s FY18 financial performance came within ours but below consensus expectations, accounting for 95% and 89% of ours and consensus full year FY18 earnings estimates respectively.

Impact on earnings. We are retaining our earnings estimates at this juncture. We view that the earnings growth will be driven primarily by the demand of its MEMS microphones. Meanwhile, we expect the demand for power management to remain soft.

Dividend. In-line with the weaker earnings, Unisem’s 4QFY18 dividend amounted to 3sen from 4sen a year ago. This lead to full year FY18 dividend of 7.5sen, a decline as compared to FY17 dividend of 11sen.

Target Price. We ascribe target price of RM2.70. This is premised on pegging FY20 EPS of 18sen per share against forward PER of 15. Our target PER is based on its two year historical high rolling PER.

Revert to Neutral. Unisem’s share price continues to underperform. On a year-to-date basis, the share has decline by -6.3%yoy which we believe was mainly due to Unisem’s lower utilisation and unfavourable product mix, leading to profit margin compression. 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. Moreover, due to the weak financial performance, we view that the future dividend declared is also less attractive as compared to its peers.

Source: MIDF Research - 26 Feb 2019