Signs point to passive 4Q. As expected, management is guiding for a subdued 4Q, during which revenue might only grow by 3%-5% q-o-q at best. We do not discount the possibility of an upside as product mix will be a key determinant of growth. However, we are cautiously optimistic given that international semiconductor players are guiding for a weak quarter ahead (Table 1). Traditionally, 4Q is the strongest quarter for worldwide semiconductor sales (Figure 1).

4Q may swing back into the red. Unisem is currently freeing up space at its Ipoh plant for future wafer level chip scale packaging (WLCSP) and Modules works ' both of which are high-margins products. As a result, we understand it may book in a one-time write-off expense next quarter due to the consolidation of older product lines. Management, in turn, is guiding for its headline 4Q net profit potentially turning red again. Moving forward, the company will practice prudent capex spending and for a start, it is targeting FY12 capex of about RM120m (vs RM282.4m in FY11). Unisem already spent RM82.5m for the first nine months of this year.

A leg-up in future margins. Over the longer term, management intends to improve its EBITDA margin to 30% (vs 17.4% in 3QFY12) by altering its product mix. No timeline was given with regards to achieving the target. Another initiative by Unisem is to increase its average selling prices for selected leaded packages by 15%, effective 1 Jan 2013, to soften the impact of rising cost from the implementation of minimum wage policy. We believe current profit margins are sustainable going forward.

Downgrade to NEUTRAL, FV revised to RM1.05. After the company missed our 9MFY12 estimates, we are revising lower our FY12/FY13 core profit forecasts to 'RM9.7m/+RM24.2m from +RM1.5m/+RM31.5m previously, as we do not think the company could return to the black in FY12. Due to the lack of catalysts, we are downgrading the stock to NEUTRAL, with an FV of RM1.05 based on 0.7x FY13 P/NTA (previously 0.8x FY13 P/NTA). We are also increasing our discount to the historical five-year sector average of 1.4x P/NTA from 40% to 50%.

Source: OSK