We expect Unisem’s earnings growth momentum to slow down going forward, as we now forecast the USD/MYR rate to average MYR3.80 next year (vs MYR4.00 for this year). Since its current valuation multiple is on par with that of its regional peers and with the export theme likely to fade on potential strengthening of the MYR, we downgrade our call to NEUTRAL with our TP revised to MYR2.40 (from MYR2.82, 9% upside).

MYR factor to subside. We believe Unisem's near-term earnings are likely to be sustained on favourable forex rates, given the current USD/MYR of 3.94. That said, we expect its growth momentum to slow down going forward, after taking into account our latest average forecast of USD/MYR of 3.80 (from 4.10) for next year. We estimate that every 1% appreciation in MYR vs USD may potentially erode earnings by 4-5%, assuming all else is constant. Also, the outlook of the global semiconductor industry looks increasingly challenging, as regional competition intensifies while overall demand may decelerate amidst global economic uncertainty. Potential for more dividends. On a positive note, Unisem’s net cash pile grew further with its cash/debt closing at MYR163.6m/MYR97.8m as at March. This could imply the potential for more generous dividends going forward (a payout ratio of 47% last year, with a total DPS of 10 sen). We forecast a decent yield of 5-5.9% pa, pegged on a payout ratio of 60-63%. Forecasts and risks. We trim our FY16F/FY17F EPS by 4%/10.7% to take into account our latest 2016/2017 USD/MYR estimate of 4.00/3.80 (from 4.30/4.10), which in our view would be partly offset by slower ASP erosion. Key risks include further strengthening of the MYR against the USD and a potential slowdown in the global semiconductor market.

Downgrade to NEUTRAL. With the forex theme likely to dissipate in anticipation of further strength in the MYR as we move into 2017, we now peg a revised 1-year forward P/E of 12x (from 15x) to be in line with its regional peers’ multiple. Our TP now stands at MYR2.40 (from MYR2.82). Given the limited upside, we downgrade our call to NEUTRAL.

DCF valuation. In our corroborative DCF valuation, we assume capex allocations of MYR200m pa for the foreseeable future. We also peg a TG rate of 0.5%. The derived equity value of MYR2.48 translates into 12.4x 2017 P/E, which we deem as reasonably close to our target multiple of 12.0x.

Source: RHB Research - 27 Apr 2016