Unisem (M) Bhd
(Aug 8, RM2.52)
Downgrade to hold with an unchanged target price (TP) of RM2.85: Unisem (M) Bhd’s share price has risen by 30% from its low in February, outperforming its peers in the Malaysian semiconductor space. Its first half ended June 30, 2016 results were decent relative to peers thanks to a more diversified smartphone exposure and contribution from other segments such as automotive.

We believe Unisem is quite comfortable that it will be seeing higher orders from its two key customers in the financial year ending Dec 31, 2016 (FY16), as new design wins for radio frequency components are likely to have been firmed up by now. However, given the uncertain macroeconomic outlook, we prefer to be more conservative and forecast flat US dollar sales growth in FY16 versus management guidance of 6% growth early this year.

Our TP of RM2.85 is pegged to 1.5 times FY16 price-to-book value, which implies 12.6 times FY16 price-earnings ratio with 12% return of equity. Given the limited upside now after the share price rose 39% from its low in February, we end our “buy” call on Unisem and downgrade it to a “hold” call.

Risks include major slowdown in smartphone sales. In recent years, global semiconductor sales have been mainly driven by the strong growth in demand for smartphones and tablets. Thus, a major slowdown in smartphone sales will hurt the industry and Unisem. — AllianceDBS Research, Aug 8