This article first appeared in The Edge Malaysia Weekly on May 7, 2018 - May 13, 2018

UNISEM (M) Bhd chairman and group managing director John Chia Sin Tet believes investors have been “overly dramatic” in selling down his company’s stock following an unexpected 86.5% plunge in earnings in its first quarter ended March.

But while investors may be pulling back, Chia appears to be putting his money where his mouth is.

He has been actively purchasing Unisem shares following a near 20% fall in its share price to an intraday low of RM1.78 on April 25, which prompted Bursa Malaysia to suspend proprietary day trading and intraday short selling of the counter for the rest of the day.

Over the past two weeks, Chia has acquired 1.3 million shares in the outsourced semiconductor assembly and test services (OSAT) provider to raise his stake to 24.3%.

Contacted by The Edge, he attributed Unisem’s worst quarterly performance since 2013 primarily to foreign exchange losses, mainly pertaining to cash reserves held in US dollars for its operations in China.

The group recognised a forex loss of RM9.95 million in 1QFY2018, compared with RM289,000 a year ago.

“We had a lot of US dollars in cash from our China operations and when we consolidated our accounts, we had to recognise a forex loss,” Chia explains. This was because of the US dollar weakening against the renminbi.

“Hopefully, in the second quarter, we won’t need to make another provision. In fact, the US dollar has strengthened,” he says, adding the group does not have a long position on the greenback.

“We convert most of our US dollars into ringgit upon receipt, and we only keep some for US dollar-denominated payables. About 40% of our material costs are in US dollars and our capital expenditure for equipment is also payable in US dollars.”

One strategy Unisem will be undertaking is to ensure its product mix is more diverse as it is key to ensuring healthy utilisation rates, Chia had stressed at the company’s AGM last month.

“You can’t be dependent on just smartphones, so we are also into the automotive sector, power management, and computer peripherals ... these are our major end-segments. Our average utilisation rate is around 60% to 70%, (but) to us, an optimal utilisation rate is around 85% and we are working towards that. We definitely will be busier compared to the last quarter,” he said at the AGM.

Bloomberg analysts tracking the stock were mixed on Unisem, with almost half still calling a “buy” and the rest recommending “hold” or “sell”.

MIDF Research downgraded Unisem from a “buy” to a “trading sell”.

“The first quarter is historically the weakest. However, the unfavourable exchange rate has unexpectedly put more pressure on the group’s earnings. While we expect production to pick up pace towards the second half of 2018, we expect the earnings upside to be rather limited as the ringgit remains steady below 4.00 to the US dollar.

“Furthermore, we do not expect significant cost savings should the group step up its cost-saving initiatives. The weak earnings outlook is also expected to limit the group’s ability to pay attractive dividends,” says the research house, which has a RM1.90 target price for the stock.

AffinHwang Capital was also less sanguine, and maintained its “sell” call with a lower target price of RM1.58.

“Despite management’s more upbeat outlook for 2Q18 (with) sequential revenue guidance of an increase of 5% to 10% quarter on quarter in USD terms, we think that earnings would likely continue to be impacted by the firmer ringgit. We downgrade our 2018 /2019/2020 estimated earnings per share by 45%/34%/34% respectively, taking into account the weaker margins,” the firm says.

Even so, Unisem has its fair share of “buy” advocates, including AllianceDBS Research, whose RM2.60 target price presents a 45.3% upside to last Thursday’s close of RM1.79.

“Unisem’s share price has corrected by 39% year to date, and we believe this has largely priced in the forex headwinds on earnings as well as weak sentiment on the stock.

“Notwithstanding that, we remain positive on Unisem’s capacity expansion for its wafer-level chipscale packaging and wafer bumping segment, which should be visible by the second half of 2018 and is a key re-rating catalyst.

“The stock offers an attractive net yield of 5% based on 11 to 12 sen annual dividend per share, which is sustainable by its healthy net cash position of 34 sen per share,” says the research house.

CIMB Research is also of the view that better times are in store for the company, whose market capitalisation has slipped to RM1.3 billion.

“Although Unisem is facing a challenging near-term outlook due to forex volatility, we believe the group’s fundamental growth remains intact driven by its strategic expansion towards 8-inch and 12-inch wafer bumping capacity in Ipoh and Chengdu that will allow it to gain better economies of scale than its OSAT peers in the next 12 to 18 months.

“Also, we expect narrowing losses in its Batam operations,” it says.

Buyback to cushion share price?

At Unisem’s AGM, shareholders approved the group’s plan for a proposed buyback of up to 10% of its issued share capital using internal funds or borrowings.

Buybacks are normally undertaken when management feels the shares are undervalued. This could help cushion prices.

Chia observes that this is the first time Unisem has asked shareholders to approve a buyback.

“ It is still early days as there are guidelines to follow, but we have taken the stand that the company’s funds are primarily to be used for its businesses, and we will only intervene and buy back shares when there is extreme volatility.

“In other words, if the share price falls too much and the reason has nothing to do with our operations or the market ...  maybe it was because of some forced selling or some short selling ... then in those circumstances, we may go back into the market and buy back some of our shares.”

Unisem’s cash position, sans its borrowings, stood at RM252.47 million as at March 31, which should give the group some buffer should a share buyback be required.

“I have made it known that our use of cash policy is one third to pay dividends, one third for capex and one third to pay back banks if we have borrowings,”says Chia.

The group did not declare any dividends for 1QFY2018. For FY2017, the group paid total dividends of 11 sen per share. Assuming the same payout for FY2018, and based on its current price, its dividend yield works out to 6.2%.

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