KEY INVESTMENT HIGHLIGHTS

• 3Q19 normalised earnings reduced by -45.5%yoy to RM14.7m as sales volume dwindled

• The automotive segment declined at the fastest pace as compared to the other segment

• Cumulative 9M19 normalised earnings came in within our expectations at RM34.1m (-46.8%yoy)

• Batam’s operation will carry on until March 2020 to meet its final customer orders

• Maintain SELL with a revised TP of RM1.80

Post quarterly loss. Unisem posted 3Q19 loss of RM-3.2m. After excluding exceptional items which mainly consist of: i) severance and reversal of retirement benefits in PT Unisem (RM22.4m) and, ii) forex gain (RM4.4m), 3Q19 normalised earnings came in at RM14.7m, representing a decline of -45.5%yoy. The decline in earnings was mainly attributable to lower sales volume across all regions and higher deferred tax expense. This has negatively impacted 3Q19 profit margin to 4.7% from 7.9% as at 3Q18.

Decline in topline contribution. 3Q19 revenue reduced by -7.8%yoy to RM316.3m. Based on market segment, revenue derived from the automotive segment declined at the fastest pace of -18.1%yoy. This is followed by industrial (-7.8%yoy), PC (-7.8%yoy), consumer (-4.5%yoy) and communication (-3.8%yoy).

Capital spending. Unisem’s 3Q19 capital expenditure (capex) eased by -21.3%yoy to RM34.0m after heightened capex in 1H19. Collectively, 9M19 capex amounted to RM197.4m, an increase of +60.9%yoy. Note that 3Q19 capex was mainly incurred for final bump fab investments, testers and handlers and EOL upgrades for Plater and laser mark.

Within expectations. Cumulatively, 9M19 normalised earnings amounted to RM34.1m, a contraction of -46.8%yoy. This came in within ours but below consensus expectations, accounting for 70.4% and 51.5% of full year FY19 earnings estimates respectively

Target price. We are revising out target price to RM1.80 (previously RM1.38). While we keep our FY19 and FY20 earnings estimates unchanged, we are updating our forward PER to 20.9x from 16.0x previously which is the group’s two year historical average PER. We view that the revision in the valuation multiple corresponds with the positive development surrounding the US-China trade war

Source: MIDF Research - 29 Oct 2019