CIMB Research still expects Unisem to record stronger earnings delivery in 2H18F, driven by its 8-inch wafer capacity expansion in Ipoh,
KUALA LUMPUR: CIMB Equities Research is retaining its Add rating for semicon company Unisem but cut its target price from RM3.60 to RM2.50 due to the weak investor sentiment and rising market volatility.
It said on Wednesday the lower target price of RM2.50 was based on a lower 12 times CY19F price-to-earnings (P/E), a wider 20% discount to the target sector P/E of 15 times in view of weak investor sentiment and rising market volatility (vs. 10% previously).
“Stronger earnings delivery, depreciation of the ringgit vs. the US$ and higher dividends are potential re-rating catalysts. Key downside risks to our call are appreciation of the ringgit vs. the US$ and delays in its new capacity expansion,” it said.
CIMB Research said Unisem’s revenue in 1Q18 fell 10.7% on-year to RM322mil mainly due to the appreciation of the ringgit vs. US$.
In US$ terms, revenue grew by 1.1% on-year to reach US$82mil in 1Q18 on the back of higher sales recorded in leaded and leadless packages.
Operating expenditure (opex) rose due to higher staff cost from wage increments and bonus payout.
Overall, 1Q18 core net profit fell by 65% on-year to RM16mil, after stripping out a RM10mil unrealised forex loss.
Sequentially, US$ revenue fell by 4.7% on-quarter, within the 0%-5% guided by management previously.
CIMB Research said the group attributed the decline to seasonal demand weakness in the first quarter. The group’s utilisation rates fell to 60%-65% in the quarter.
Moreover, Unisem posted a wider sales decline of 10% on-quarter in ringgit terms, due to the appreciation of the ringgit vs. US$ in the quarter. As a result, the EBITDA margin dropped by 7.8% pts to 17.9%.
“Overall, core EPS in 1Q18 plunged 56% on-quarter to RM16mil, the lowest in four years,” it said.
The automotive and industrial (A&I) segment’s revenue (made up 32% of group revenue in 1Q18) grew 4.3% on-year, partly due to growing semiconductor content adoption in the segment. However, this was offset by weaker PC sales (-5.2%) due to sluggish demand.
“Unisem is guiding for 5%-10% sequential US$ revenue growth in 2Q18, driven by robust recovery in industry demand.
“This is on the back of resilient demand for power management, automotive and internet-of-things applications,” it said.
Unisem spent RM45.1mil in capex in 1Q18 (vs. RM71.2mil in 1Q17) to buy flip-chip bonders, bumping and wafer level equipment and test probers to support its new business in China.
“We cut our FY18-20F EPS by 15%-30% to account for the narrowing margins of its legacy packages and higher staff cost.
“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 12-18 months. Also, we expect narrowing losses in its Batam operation,” it said.
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