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This article first appeared in The Edge Financial Daily on November 3, 2017

Unisem (M) Bhd
(Nov 2, RM4)
Maintain add with an unchanged target price (TP) of RM5, still based on 15 times 2019 price-earnings ratio in line with sector mean, as we roll over valuation to end-FY18:
Sept 30, 2017 earnings were sequentially weaker as US dollar revenue grew 6% quarter-on-quarter (q-o-q) to US$89.7 million (RM379.43 million) in the third quarter of financial year 2017 (3QFY17) versus US$84.5 million in 2QFY17 driven by higher sales from the wafer-level chip scale package, which grew 17% q-o-q.

This was ahead of management’s guidance of a 5% sequential revenue growth in 3QFY17.

However, it was negatively impacted by the strengthening of the ringgit against the US dollar, up 2% q-o-q.

Overall, core net profit fell by 1% q-o-q due to lower grant income recognised in the quarter and wider forex losses from the strengthening of the ringgit against the US dollar.

US dollar revenue in nine-months (9MFY17) grew 8% year-on-year (y-o-y) to US$254.8 million due to higher sales across all product portfolios.

In terms of end-segments, industrial and consumer posted strong 9MFY17 revenue growth of 40% and 17% y-o-y respectively, while lower sales were registered at communication (-8%).

Meanwhile, sales improvements were amplified by the depreciation of the ringgit versus the US dollar, resulting in a 15% y-o-y revenue growth in ringgit terms.

Overall, 9MFY17 core net profit rose 16% y-o-y. Unisem declared a second interim dividend per share (DPS) of 3.5 sen, bringing 9MFY17’s dividend to seven sen, in line with our expectations.

Although management is guiding for flat revenue growth in 4QFY17 in US dollar terms, we expect stronger earnings delivery driven by lower overtime costs in 4QFY17F (forecast) due to a reduction in staff costs compared to 3QFY17.

The group incurred an additional overtime expense of RM500,000/day as there were more public holidays in 3QFY17.

We expect a stronger demand pickup in the communication segment in 4QFY17F from new and existing smartphone models and a gradual improvement in the auto segment.

Unisem is planning to invest in a 12-inch 10k wafer bumping line in Ipoh.

The investment could cost them between RM105 million and RM120 million in FY18, but it could provide opportunities for Unisem to move up the value chain, in our view, given the line production will be for high-end microphones used for smart devices.

Unisem is also considering adding on a potential Chinese wafer foundry customer following its capacity expansion in Chengdu in 2018 which could help boost the growth of its China operations.

We cut our FY17-FY18F earnings per share (EPS) forecasts by 10% to account for ongoing losses at the Batam operations, but raise our FY19F EPS by 10% as we expect stronger earnings delivery from new initiatives in Ipoh and Chengdu.

Stronger earnings delivery, depreciation of the ringgit versus the US dollar and higher dividends are catalysts.

The key downside risks are appreciation of the ringgit versus the US dollar and weaker earnings. — CIMB Research, Nov 2

 

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