Summary

• An increase of 23.4% in the revenue from the corresponding quarter from RM 289 million to RM 357 million.
• Gross Profit and Profit have increased by 87% and 98%, respectively compared to the corresponding quarter.
• A tremendous growth in their profit has brought down their PE from 70-80 range to 50-55.
• Foresee further growth ahead driven by RF technology and recovery in their automotive and PC segment.
• An interim dividend of 0.02 sen was announced. Dividend yield of 1.18%.

Overview of Unisem (M) Berhad
Unisem (M) Berhad is engaged in the manufacturing of semiconductor devices. The Company is a semiconductor assembly and test services provider in Malaysia which has a plant in China, Chengdu as well.
The Company offers a suite of assembly and test services, such as wafer bumping, wafer probing, wafer grinding, a range of leadframe and substrate integrated circuits packaging, wafer level chipscale packaging (WLCSP) and radio frequency testing services.

The company provide services to mainly five (5) market segments which are communications, consumer electronics, PC, industrial and automotive segment. The main growing segments are communication and consumer products.

Financial Results Analysis

• In 2019, the Company incur a loss mainly due to net expenses incurred on severance and reversal of retirement benefits amounted to RM39.3 million and impairment losses on fixed assets and write down of inventory to net realizable value amounted to RM24.7 million and RM9.9 million respectively. The expenses were incurred in 2019 as the Company decided to close the facility in Batam, Indonesia, that has been bleeding since 2011.
• The improvement in revenue and net profits was mainly attributable to higher sales volume, improved average selling price and appreciation of USD/MYR exchange rates.
• Based on the above graph (Graph 1.1), we could observe that the demand for leadless product & services, test services and MEMS microphone/ True Wireless stereo is increasing. This could be driven by the increase demand for 5G developing devices, especially coming from their China Operations (i.e. Chengdu, which has a total built-up area of about 620,000 square feet).
• The recent increase of the Company revenue and profit in Q2 2020 and Q3 2020, mainly driven by the demand from USA and Europe.

Loss from Indonesia is over?

• Upon the cessation of the Company manufacturing operations in PT Unisem since 31st March 2020, we do not foresee further losses in the coming quarter. In our opinion, the cessation of their Indonesia plant was timely. If the company were to cease the Indonesia plant, couple with the current pandemic situation in Indonesia, the Company would have incur more losses.
• During the spin-off or cessation of their Indonesia manufacturing operations, the Company had made significant expenses for staff severance, reversal of retirement benefits and further provisions and impairments.

Any Potential Growth within the Industry?

KUALA LUMPUR: North America-based manufacturers of semiconductor equipment reported strong global billings in September, reflecting the demand for semiconductors. The Semiconductor Equipment Manufacturers Industry (SEMI) posted on its website late Thursday that billings rose to US$2.75bil in in September 2020 (three-month average basis). According to the September equipment market data subscription (EMDS) billings report, the billings figure was 3.6% higher than the final August 2020 level of US$2.65bil. The billing were also up 40.3% than the September 2019 billings level of US$1.96bil.

The Star Newspaper reported on Friday, 23 Oct 2020.

This could be further evident by the information furnished by SEMI Org.

Valuation
Assuming that potential growth within the OSAT industry is at 20-30% moving forward and excluding the Q1 eps due to the spinning-off of their Indonesia operations, the projected share price that investors could derive:

• Scenario 1 (20% Growth): Cumulative quarter for Q2, 2020 and Q3, 2020 (11.65 sen), projected Q4, 2020 (8.30 sen) and project Q1, 2021 (9.90 sen) with PE of 22 (conservative PE for semiconductor industry), the fair value of the company shall be RM 6.56, which is approximately 50% discount from the current share price.
• Scenario 2 (Stagnant Growth) : Cumulative quarter for Q2, 2020 and Q3, 2020 (11.65 sen), projected Q4, 2020 (7 sen) and project Q1, 2021 (7 sen) with PE of 22 (conservative PE for semiconductor industry), the fair value of the company shall be RM 5.60, which is approximately 27% discount from the current share price.

The above scenario view is at a shorter to medium time frame (6 months to 9 month period) and provided that covid -19 does not resurface in China, as one of their main productions and high growth demand lies within their China operations.

On a longer-term perspective, if semiconductor demand and growth were to persist in the next 1/2 years, the company should demand a higher fair value. On top of that, the adjacent Unisem property of 260,000 square feet in Chengdu, Operations, has been earmarked for the Phase 3 expansion of the production facility in the near future. At present, the current equipment capacity is about 8.5 million units/capacity a day.

With that being said, there could be still growth in the company share price which is currently trading at a PE of 58. Hence, it’s not advisable to look at the current PE of 58 and assuming that the company is already trading at fair value.

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