Unisem (M) Bhd
(Dec 16, RM1.78)
Downgrade to “sell” from “reduce”, with target price of RM1.54: Unisem’s share price is up 79.1% year-to-date, a large part due to its earnings turnaround. This has been underpinned by its restructuring strategy, implemented over the past two years, which included a reduction in head count, termination of low-volume older packages and reducing high-mix production. In addition, the semiconductor market was robust, aiding an all round recovery.

Going forward, with increasing risk of demand uncertainty kicking in, and cost down strategies being sparked off by Chinese handset device manufacturers, we are less certain that manufacturing conditions will be as favourable as experienced over the past two years. We understand that some inventory correction is already occurring in the industrial and consumer product segments.

Taking this all into account, we think that the risk reward has turned less favourable and valuations at 17.3 times 2015 earnings per share is unappealing, especially when earnings are becoming less easy to predict. We leave our earnings forecast unchanged but downgrade Unisem to a “sell” from “reduce”. Our 12-month target price for Unisem remains unchanged at RM1.54 based on an unchanged 2015E one times price-to-book value, in line with mid-cycle valuations. Key upside risk is that is that earnings continue to positively surprise. — AffinHwang Capital Research, Dec 16

This article first appeared in The Edge Financial Daily, on December 17, 2014.