This article first appeared in The Edge Financial Daily on November 7, 2018

Unisem (M) Bhd
(Nov 5, RM3)
Accept offer with a fair value of RM2.50: We maintain our “accept offer” recommendation on Unisem (M) Bhd at the offer price of RM3.30 per share, representing a 32% upside from our fair value of RM2.50 per share. Our valuation is pegged at a financial year 2019 forecast (FY19F) price-earnings of 14 times. We keep our earnings projections unchanged.

We came away from Unisem’s third-quarter (3Q) FY18 briefing learning that its 4Q earnings will not see any surprise, as management guided a flat quarter-on-quarter (q-o-q) growth. With concerns surrounding the US-China trade war with regard to technology disputes and a less favourable global market condition, several of its customers relating to power chips and Internet of Things players are carrying out inventory adjustments by holding off from placing orders until the last minute. Our earnings forecast has taken into account the flat growth in 4Q.

In terms of products breakdown (in US dollar), the consumer and automotive segments continued to experience growth of 3% and 2% respectively on increased complexity in semiconductor content. The PC and communication segments saw marginal declines of 4% and 2% respectively on tapering demand.

Moving into 4Q, Unisem expects the automotive segment to continue growing albeit at a gradual pace. This translates into more packaging jobs for several new products. It is also expected to ramp up production of micro-electromechanical systems microphones used for voice recognition.

With the new dual-capacity (8- and 12-inch) bumping facility in Ipoh completed, it is expected to increase Unisem’s bumping capacity from about 20,000 wafers to 27,000 wafers per month, and potentially raise average selling prices given the 12-inch wafers command two times the pricing of 8-inch wafers. Management expects to conclude the qualification process for several new customers to use the facility by 4QFY18, and anticipates earnings contribution to kick in subsequently.

At the current price, we believe the company is fairly valued. Unisem is currently trading at a one-year forward price-earnings of 16.5 times, a slight premium to its five-year average of 14 times.

Pertaining to Tianshui Huatian Technology Co Ltd’s (TSHT) takeover offer, the group reiterated this exercise will be synergistic for both parties given their respective customer base. Sixty per cent of Unisem’s revenue comes from the American and European regions, while TSHT’s revenue is mostly concentrated in China. — AmInvestment Bank, Nov 5