Review

• Unisem posted a 1QFY17 net profit of RM44.9mn (-12.5% QoQ, +29.4% YoY). This was within ours and consensus expectations at 22.7% and 26.7%. As per historical trends, no dividends were declared.

• QoQ. Declining 3.2% QoQ, USD revenue performed better than previous guidance (5.0% QoQ decrease). Momentum from the 4QFY16 carried forward, with strong industrial revenues (+11.6% QoQ) helping offset a fall in communication (-10.2% QoQ), auto (-8.9% QoQ) and PC (-3.2% QoQ) sales. EBITDA margins contracted 3.0pp due to: 1) Increments, salaries & bonuses; 2) Changes in product mix and 3) Forex loss of RM0.3mn (vs. gain of RM4.4mn in the previous quarter).

• Capex tripled sequentially to RM71.2mn. This was spent on flipchip bonders, Cu & low loop wire-bonders, bumping & wafer level equipment and probers for test. WLCSP capacity at Chengdu quadrupled to 2.0mn/day to support new businesses. Being front end loaded, full year capex guidance remains at 35% of EBITDA.

• YoY. Albeit aided by a higher USD/MYR rate (+6.0% YoY), underlying USD revenue showed healthy growth from a year ago. USD revenue increased 6.8% YoY, being the highest first quarter sales recorded in four years. Barring communications (-10.5% YoY), growth was recorded across all segments. EBITDA margins stood fairly stable at 25.7%.

• Dropping slightly, its net cash remains healthy at RM193.9mn. While there are no intention for M&A activities, we opine its balance sheet position is able to support improved dividends. We estimate a FCFE yield of 7.4%.

Impact

• No change to our earnings estimates.

Outlook

• Exhibiting strong momentum, USD sales is estimated to increase by 5.0% QoQ. With increased capacity at Chengdu, total WLCSP capacity has increased 23.1% to 8.0mn chips/day. This will be supported by new businesses in China for bumping and WLCSP. Specifically, this is related to power management devices for SSD drives and mobile processors. There are also plans to launch new packages in the second half, but these remain in development. Overall, supported by activity related to a major smartphone model, we expect a stronger second half. We are forecasting a conservative USD sales growth of 4.3% YoY for 2017.

Valuation

• We value Unisem at an unchanged TP of RM3.55/share – based on an EV/EBITDA multiple of 5.0x and CY18 EBITDA. We see the group as a beneficiary of the improved outlook in the semiconductor industry and weak ringgit. Supported by its healthy balance sheet, expected dividend yields are also attractive at 3.7%. BUY.

Source: TA Research - 26 Apr 2017