Unisem’s  FY14  core  profit  of  MYR63.5m  came  in  within  our expectations  but above consensus at 98.1% and 111.5% of the full year forecasts  respectively.  Following  recent  share  price  appreciation,  we downgrade  our call to NEUTRAL  (from Buy)  with our TP  fine-tuned to MYR2.30 (15.8x CY15 P/E, 8.4% upside) after our earnings revision.

Results review.  FY14 revenue of MYR1.04bn  expanded  4.8%  YoY  on favourable forex at an average of MYR3.27 per USD in FY14 (MYR3.15 for  FY13).  EBITDA,  meanwhile,  surged  41.0%  YoY  to  MYR251.0m  onbetter product  mix and the cessation of its loss-making European unit in end-2013.  All in,  FY14 core earnings of MYR63.5m came in within our expectations.  Management declared a  final  DPS of  4.0 sen,  bringing its FY14 DPS to 6.0 sen. This translates into FY14 payout ratio of 63.7%.

Key highlights.  Management is guiding for  -5% to  -10%  QoQ revenue growth for  1Q15 due to seasonality. This,  in our view,  could potentially be  mitigated  by  continued  strength  in  USD  against  MYR.  The  group reaffirmed its near-term focus on the wafer level packaging and bumping business, which makes up 28% of its 4Q14  sales (21% in  FY13). Sales to the  communication  sector made up 32% of its revenue in 4Q14 (28% in  FY13),  while  contributions  from  its  consumer  and  auto  segments registered at 25% (27% in FY13) and 17% (15% in FY13) respectively.

Forecasts and risks.  We upgrade our FY15F-FY16F EPS by 3.3-6.6%as  we  updated  our  model  following  the  release  of  its  full-year  results. Key  risks  are: i)  the  strengthening  of  MYR against  USD,  ii)  higher  raw material costs, and iii) a slowdown in the semiconductor market.

Downgrade  to  NEUTRAL.  We  raise  our  TP  marginally  to  MYR2.30 (from  MYR2.16)  based  on  an  unchanged  CY15  P/E  of  15.8x  following our  earnings  revision.  Nonetheless,  we  are  downgrading  our  call  to NEUTRAL due to limited upside.  We caution that the group’s outstanding 168.5m  warrants  (currently  out-of-money  at  an  exercise  price  of MYR2.18  and to expire by 24 Aug 2015)  could potentially witness some conversion  interests  should  the  current  uptrend  in  share  price  persist . Assuming full conversion, Unisem’s share base would increase by 25% to 842.7m  with a corresponding dilution in our EPS estimates. At our TP of MYR2.30, Unisem will trade at 17.4x CY16 P/E, which we deem fair,based on a fully-enlarged share base.

Source: RHB