• We expect Unisem (M) Berhad’s (Unisem) long term growth to pose a gradual recovery as it benefits from i) rising 5G and AI adoption, ii) recovery and expansion in China’s market albeit at a slower pace, and iii) improved efficiency as production shift from old Simpang Pulai plant to the new Gopeng plant.

• Nonetheless, we are concerned that the company could lag behind its peers as it appears cautious to invest in advanced packaging technologies. The conservative approach to innovation may impact its competitiveness and growth potential, in our view.

• In near term, we foresee the outlook to remain challenging, no thanks to higher operating cost from the implementation of higher minimum wages, mandatory EPF contribution, and multilevy mechanism on foreign workers. The intensified global pricing war within the traditional chip packaging business would also limit the upside to earnings.

• We think the risk-to-reward is not favorable at this juncture. We believe the stock does not deserved to be traded at current 12- month forward PER of 44x in view of the likelihood of stunted growth potential as well as its inferior profit margin and ROE against its peers that currently trades between 11x – 33x PER.

• We resume coverage on Unisem with a SELL call and at a target price (TP) of RM2.27, implying a PER of 32x (average of 8-year historical forward PER) on 2025F EPS of 7.1sen.

Lagging in Technological Advancement

While we acknowledge Unisem (M) Berhad’s (Unisem) potential to benefit from increasing adoption of 5G and artificial intelligence (AI), we note the company’s cautious stance in committing to advanced packaging technologies, instead remained focus on mainstream technologies and the traditional chip packaging. This conservative approach may restrict its ability to fully capitalize on emerging growth opportunities in advanced technology markets, in our view.

Challenging Outlook in Near-term

We think Unisem’s immediate outlook could be constrained by prolonged margin compression, stemming from higher operating cost and intensified global pricing war. We also expect higher minimum wages, mandatory EPF contribution and multi-levy mechanism on foreign workers to hit margin in the near-term.

Resume Coverage on Unisem with a SELL call at new TP of RM2.27

We resume coverage on Unisem with a SELL call at a new target price (TP) of RM2.27, based on a PER of 32x (8-year average forward PER) on 2025F EPS of 7.1sen. Upside risks to our recommendation include: 1) a stronger-than-expected recovery in China’s market, 2) being a beneficiary of China +1 and Taiwan +1, and 3) enhanced cost optimisation through potential mergers and acquisition (M&A).

Source: BIMB Securities Research - 3 Dec 2024