Unisem (M) Bhd
(Aug 7, RM2.10)
Maintain sell with a lower target price (TP) of RM1.77 from RM2.02 previously: First half of financial year 2019 (1HFY19) core profit of RM19 million was below expectations, accounting for only 21% to 24% of our and the street’s full-year expectations. The earnings miss was largely due to weaker-than-expected revenue, as Unisem (M) Bhd management guided that their customers were impacted by the US ban on Huawei Technologies Co Ltd. While the ban has been “lifted”, Unisem guided that demand remains soft and has not reverted to pre-ban levels, and expects the third quarter of financial year 2019 (3QFY19) to be flat at best and remains cautious for 2HFY19.

 
Unisem’s earnings jumped 30% quarter-on-quarter (q-o-q) from 1QFY19’s low base. The improvement was driven by earnings before interest, taxes, depreciation and amortisation margin enhancement (+1.8 percentage points q-o-q) likely due to a favourable product mix while revenue grew at a slower 2.9% q-o-q, below management’s earlier guidance.

We cut our earnings forecasts by 12% to 29% to reflect the earnings disappointment. While our 2019 earnings forecast implies earnings improvement in subsequent quarters, we are still projecting earnings to be weaker for the full year, as we expect US-China trade tensions to negatively affect its utilisation and growth over the near term. Our lower TP is based on an unchanged five-year mean price-earnings of 15 times 2020 estimated earnings per share. Valuations remain expensive while risk to earnings remains to the downside as the global economic growth engine falters. Key upside risks include a sharp depreciation of the ringgit, which will positively impact earnings, increased outsourcing opportunities, and shareholder Tianshui Huatian Technology Co Ltd transferring some of its business to Unisem. — Affin Hwang Capital, Aug 7