KUALA LUMPUR: CIMB Equities Research has downgraded Unisem to Hold with a lower target price of RM2.50 after its core net profit for the nine months to September 2016 was below expectations due to lower-than-expected sales in the communication segment.
The research house said on Friday the core net profit was at 65% of its consensus and at 71% of Bloomberg survey.
“In spite of the weaker sales, core net profit grew 7.8% on-year in 9M16 due to favourable currency movement and lower finance cost. Higher dividend of 3.5 sen declared for 3Q16, in line with expectation (3Q15: 3 sen).
“We cut our FY16-18F EPS by 14-16% to account for lower sales in the communication and consumer segments,” it said.
It said the US$ revenue fell 1% on-quarter in 3Q16 from US$80mil to US$79mil due to weaker sales in the communication segment, down 6% on-quarter on the back slowdown in smartphone demand.
“This was slightly below management's guidance of 0%-5% sequential revenue growth.
“However, Unisem benefited from the depreciation of Ringgit against the US$, which resulted in minimal sequential revenue growth of 0.3% in Ringgit terms. Overall, management indicated that group utilisation fell to 65% in 3Q16 from 75% in 2Q16,” it said.
CIMB Research said US$ revenue fell 2.6% in 9M16 from US$242mil to US$235mil due to lower sales from its leaded (-4%) and WLCSP (-6%) segments.
In terms of end-segment, communication and consumer accounted for 54% of group 9M16 sales, down 7% on-year on the back slowdown in feature and smartphone demand.
Meanwhile, the rest of the business (automotive, industrial and PC) reported modest 3% revenue growth.
Overall, 9M16 core net profit rose by 7.8% on-year to RM111mil (US$26.4mil).
“Management is guiding for flat revenue in 4Q16 in US$ due to the sluggish demand outlook, especially in the smartphone segment, as it does not expect significant ramp-up in production for communication packages,” it said.
This is in line with projection by market research group Worldwide Semiconductor Trade Statistics (WSTS) that global semiconductor sales will fall by 3% in 2016. Meanwhile, Gartner only expects smartphone sales volume to grow at 4%-5% in 2016.
“We cut our FY16-18F EPS by 14-16% to account for lower sales from its communication and consumer segments due to sluggish demand outlook given the lack of excitement in new tier-1 smartphone launches.
“While Unisem's automotive and industrial segments are poised to benefit from Internet-of-Things applications, we expect the adoption and production ramp-up in these segments will be gradual and their near-term growth will not be able to offset the decline in communication and consumer segments.
“Following the earnings revision, we downgrade Unisem from Add to Hold, with a lower target price as we roll over our valuation to CY18F, still based on an unchanged 12 times P/E.
“While the stock offers a decent FY16-17F yield of 4.5%, we prefer Inari for its stronger earnings growth in the tech sector. Upside risks to our call are depreciation of Ringgit against US$ and a higher dividend payout. Downside risks include the strengthening of RM against US$ and weaker earnings from its communication segment,” it said.
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