Unisem (M) Berhad (Unisem) recorded a net profit of RM9.9mn in 1Q23 (QoQ: -84.9%, YoY: -80.7%), which trailed our and consensus estimates, accounting only 4% of the full year forecast. This was primary due to  softer demand for consumer electronics products, higher net opex due  to an increase in electric tariffs, and higher depreciation. Following  disappointing 1Q23 financial performance and challenging outlook  within consumer electronics segment, we turn less optimistic on  Unisem’s short-term outlook while remaining upbeat for its long-term outlook. We slashed our 2023F-2025F earnings forecast between 31% - 44% as we revised down our revenue and margin assumption.  Downgrade our call to a SELL from a BUY with a new TP of RM2.30 (from  RM3.60). Our valuation implies a 22x PER that is pegged to 2023F EPS  of 10.5 sen.

• Below expectations. 1Q23 net profit of RM9.9mn (QoQ: -84.9%, YoY: - 80.7%) trailed our and consensus’ expectations, accounting only 4% of  full year forecast.

• Dividend. Unisem declared a first interim DPS of 2 sen, implying a 326%  payout. The ex-dividend and payment date are on May 15 and May 26,  2023.

• QoQ. Revenue declined by 22% QoQ mainly due to 1) shorter working hours during Chinese New Year (CNY), 2) softer demand for consumer  electronics products, and 3) customers’ inventory adjustment. As a  results, net profit plunged by 84.9% QoQ.

• YoY/ YTD. Net profit fell by 80.7% YoY due to 1) lower revenue primarily  from softer demand for consumer electronics products globally and  customers’ inventory adjustment, 2) higher net opex due to an increase  in electric tariffs, and 3) higher depreciation. Net profit margin contracted  by 9.3 ppts YoY to 2.8% from 12.1%. Nonetheless, both of Unisem’s plants  in Ipoh and Chengdu remained profitable in 1Q23 despite running at lower utilization rate of 50% and 70% respectively.

• Outlook. Management guided a sluggish outlook for 2Q23 with 10% - 12% growth of revenue (circa USD88.6mn – USD90.2mn) while expecting a significant earnings improvement in 2H23 given better orders forecast  from customers, especially within automotive segment. Nevertheless, we  turn less optimistic on Unisem short-term outlook as we foresee the softness in consumer electronics market to persist in 2023, which could further hurt Unisem’s earnings performance.

• Forecast. We slashed our 2023F/2024F/2025F earnings forecast by  36%/32%/31% as we lowered down our revenue and margin assumption  in line with softer outlook for consumer electronics segment.

• Our call. Downgrade our call to a SELL (from a BUY) with a new TP of  RM2.30 (from RM3.60) in line with our earnings revision and less  optimistic outlook for 2023.

Source: BIMB Securities Research - 28 Apr 2023