Unisem has healthy balance sheet with net cash of RM65.8m

by **Cals** Tue 12 Jul 2016, 20:50

Unisem has healthy balance sheet with net cash of RM65.8m

By Hong Leong Investment Bank Research / The Edge Financial Daily | July 12, 2016 : 10:38 AM M

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This article first appeared in The Edge Financial Daily, on July 12, 2016.

Unisem (M) Bhd
June 11 (RM2.51)
Maintain trading buy with an increased target price (TP) of RM2.81: Unisem (M) Bhd’s share price rallied 16.5% since our last upgrade in late April, outperforming all its peers who were largely impacted by the softer smartphone market. It was and still is Hong Leong Investment Bank Research’s top pick in the tech sector.
Thanks to its diversified exposure to end-application markets, the automotive segment was instrumental in driving top-line growth in the seasonally softer first quarter ended 2016 (1Q16), despite the prolonged global inventory adjustments, especially in the smartphone market.
Automotive is becoming a significant catalyst for the sector as more integrated circuits (IC) are embedded for lighting, communication, safety, infotainment and others, while hybrid and electric cars will further spur demand. According to IHS Automotive, automotive IC is forecast to grow 6.7% year-on-year in 2016 compounded by a 3.1% compound annual growth rate in global car production.
Unisem has an edge in technology with its wafer-level chip-scale packaging (WLCSP) which is gaining popularity due to small form factor/miniaturisation trend. Although its contribution contracted in 1Q16 due to a stronger leaded demand associated with the auto market, its WLCSP is expected to gain traction as new smartphones are launched in the second half ended 2016 (2H16). This advanced packaging usually commands higher margins.
As we expect the ringgit to remain weak against the US dollar in 2H16 at RM4 to RM4.20 with a financial year (FY) average of RM4.05, this would be a boost to the majority of Unisem’s revenue which is US dollar-dominated.
Unisem has a healthy balance sheet with a net cash position of RM65.8 million as of 1Q16. A prudent capital expenditure policy allows room for dividends, with a projected yield of 5.4% for its financial year ended 2016 (FY16). The 2QFY16 revenue (in US dollars) was guided to gain by 5% to 10% quarter-on-quarter, leading to a profit after tax expectation ranging from RM40 million to RM45 million. However, risks lie in the foreign exchange, weak consumer demand, labour wage hikes and continuous drag by Batam’s performance.
We fine-tune revenue and US dollar/ringgit assumptions which led to upward revisions of FY16 to RY17 earnings per share (EPS) by 2.6% and 10.2% respectively. Positives include a strong greenback, proliferations of smartphones, tablets, wearable techs and hybrid/electric automobiles. Negatives are intense competition from Taiwanese peers, higher input costs, challenging economic outlook which will eventually hamper consumer confidence and bring a stalemate in electronics innovation.
Reiterate “trading buy” after raising our TP by 12.9% from RM2.49 to RM2.81 reflecting the upward EPS revision and rolled forward valuation. TP is pegged to 13 times of FY17 EPS. — Hong Leong Investment Bank Research, 11 July 2016
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