Share price has dropped by >20% since 2Q15 results were released and we deem the selldown unjustified, as the current favourable USD environment is likely to propel earnings to a new high. Upgrade to BUY (from Neutral) with a revised MYR2.67 TP (from MYR2.46, 37.5% upside), post our earnings revision, and as we adopt a straight line P/E method (from SOP valuation) following Unisem’s warrants and ESOS expiry.

Unjustified selldown. Unisem’s share price fell by >20% since the 31 Jul release of its 2Q15 results despite a decent quarter. We attribute this to fears over a potential dilution impact from its warrants conversion (expired 24 Aug), further exacerbated by the cautious market sentiment. We deem the selldown unjustified as management remains cautiously optimistic on its near-term outlook. Notably, Unisem is eyeing for flattish to 5% QoQ revenue growth (in USD terms) for 3Q15, leveraging on a continued improvement in customers’ order flow for its wafer level packaging and bumping wing, which made up 32% of its 2Q15 sales. Unisem has set aside a full-year capex allocation of up to MYR130m to further raise its wafer level packaging and bumping capacity.

Unlikely full warrants and ESOS conversion. Unisem’s latest share base stands at 733.8m. Post its share price decline, we gathered that its previously outstanding warrants of 116.6m at a MYR2.18 exercise price (vis-à-vis 24 Aug’s MYR1.70 closing price) expired without conversion. On a side note, management confirmed that the tenure for its outstanding employee stock option scheme (ESOS) of 5.4m shares was not extended and, hence, officially expired on 9 Aug.

Favourable forex earnings boost. We are upgrading our FY16-17F EPS by 11.5-11.9% as we revise our USD/MYR assumptions to MYR4.20 for 2015 and 2016 (from MYR3.65 previously) while tweaking our average ASPs in USD lower – we expect its direct customers to push for more competitive pricing in view of the current MYR weakness. Key risks are fluctuations in forex, higher raw material costs and a potential slowdown in the global semiconductor market.

Upgrade to BUY. We are now adopting a straight line P/E method for our valuation following the expiry of its warrants and ESOS. Pegging an unchanged 2016F P/E of 15x and based on its latest share base of 733.8m, our TP now stands at MYR2.67. Given the appealing upside of over 37%, we are upgrading our call to BUY.

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Unisem is a leading semiconductor packaging and test services provider in Malaysia.

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Source: RHB Research - 10 Sep 2015