INVESTMENT HIGHLIGHTS

• 2QFY19 normalised earnings came in -48.1%yoy lower at RM11.0m in view of lower sales volume which also impacted the group’s profit margin

• 1HFY19 financial performance, which declined by -47.8%yoy to RM19.4m, is gravely below expectation

• Future prospect remains bleak as we do not expect significant uplift in demand

• Maintain SELL with a revised target price of RM1.38

Sales continues to decline. Unisem (M) Bhd (Unisem) 2QFY19 normalised earnings reduced by -48.1%yoy to RM11.0m. The reduction in earnings was mainly attributable to the decrease in sales volume which translates into a -9.1%yoy reduction in revenue to RM311.9m. This came in below ours and consensus expectations, accounting for 7.5% and 7.6% of full year FY19 earnings estimates respectively.

1HFY19 normalised earnings severely below expectations. The poor 2QFY19 financial performance lead to 1HFY19 normalised earnings of RM19.4m, a decline of -47.8%yoy. This came in below ours and consensus expectations, accounting for merely 27.8% and 21.5% of full year FY19 earnings estimates respectively.

Impact on earnings. We are cutting FY19 and FY20 earnings estimates by -30.4% and -35.7% 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 RM1.38 (previously RM2.00). This is premised on pegging FY20 EPS of 8.6sen against forward PER of 16x. Our target PER is the group’s two year historical average PER.

Maintain 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. The closure of its Batam plant further reinforces our view that the Unisem’s earnings outlook remains grim.

Meanwhile, 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 maintaining our SELL recommendation on the stock.

Source: MIDF Research - 7 Aug 2019