INVESTMENT HIGHLIGHTS

• 1QFY19 normalised earnings came in lower than expected at RM8.4m (-47.4%yoy)

• The underperformance was caused by lower sales volume and unfavourable change in product mix which lead to thinner profit margin

• The group has yet to benefit from its strategic partnership with Huatian Technology

• Downgrade to SELL with a revised target price of RM2.00

Sales continue to decline. Unisem (M) Bhd (Unisem) 1QFY19 normalised earnings reduced by -47.4%yoy to RM8.4m. The reduction in earnings was mainly attributable to the decrease in sales volume which translates into a -5.7%yoy reduction in revenue to RM303.1m. Due to the lower sales volume and change in product mix, the profit margin also narrowed to 2.8%. This came in below ours and consensus expectations, accounting for 7.5% and 7.6% of full year FY19 earnings estimates respectively.

Impact on earnings. We are cutting FY19 and FY20 earnings estimates by -37.6% and -25.9% respectively. This is mainly premised on lower sales volume assumption which also leads to thinner profit margin.

Target Price. Post our earnings downward, we are ascribing a lower target price of RM2.00 (previously RM2.70). This is premised on pegging FY20 EPS of 13.3sen against forward PER of 15x.

Downgrade to SELL. The group continue to post dismal earnings due to lower demand emanating from weaker smartphone as well as lower car sales from China. This has lead to unfavourable change in product mix and lower utilisation rate which negatively impacted the profit margin. Meanwhile, we gather Unisem has yet to benefit from the strategic partnership for the expansion and development of Unisem’s business operations with its China’s partner i.e. Huatian Technology Sdn Bhd. As we do not foresee any significant earnings catalyst to lift Unisem’s future financial performance, we are downgrading our stock recommendation for Unisem to SELL from neutral previously.

Source: MIDF Research - 26 Apr 2019