Kenanga Research downgrades Unisem to underperform, TP 2.15

KUALA LUMPUR: Kenanga Research downgrades Unisem from market perform to underperform, lowered target price from RM2.40 to RM2.15.

It said on Tuesday the forward price-to-earnings ratio (PER) was unchanged at 18 times, in line with group’s mid-cycle PER applied to EPS for FY2020 of 11.7 sen.

“Given this set of disappointing results, expectations of another soft quarter ahead, and 34% share price appreciation since September 2019, we believe risks outweigh rewards at this juncture, ” it said.

Its 3QFY19 registered core net profit (CNP) was RM18.6mil (-46.9% year-on-year (YoY), +30.7% quarer-on-quarter), after stripping off severance expense (RM22.4mil) due to planned closure of its Batam plant, bringing 9MFY19 CNP to only RM38.7mil (-46.1% YoY), which is markedly below consensus at 60% and its forecast at 55%.

“We believe the disappointment stemmed from the lacklustre automotive industry, especially in China which was still registered declining passenger car sales.

This resulted in lower-than-expected gross profit margin of 8% (vs. expected 10%),” it said.

Kenaanga Research said YoY, 9MFY19 NP fell 46.1% as revenue declined 8.6% (US$ terms: 11.8%), stemming from weakness in the automotive and communications segments, exacerbated by higher effective tax rate of 54.7% (vs. 13.1% for 9MFY18) due to: (i) deferred tax recognized, and (ii) non-deductible losses of a subsidiary company.

“On the other hand, QoQ, 3QFY19 CNP recovered 30.7% alongside revenue improvement of 1.4% (US$ terms: +1.0%), from higher demand of radio frequency (RF)/communications components that go into Chinese mobile phones as well as 5G network infrastructure.

“Management is guiding flat to a slight dip in 4QFY19 revenue. Alongside an expected final severance payout for the closure of Batam plant, this should lead to another soft quarter in 4QFY19, ” Kenanga Research said.

Source: TheStar