• 4Q23 results missed our expectations on the back of weaker-than-expected US$ revenue performance, caused by broad-based industry weakness.

• EPS recovery hinges heavily on new key projects materialising by 2H24F, as the group eyes growth across mobile, EV and the China+1 angle.

• In our view, valuations are rich at current levels: the stock trades at 33.0x FY24F P/E, well above its 9-year mean of 21.7x. Reiterate Reduce.

4Q23 results missed our expectations

4Q23 core net profit fell 57% yoy to RM28.5m, caused primarily by a 24% decline in US$ revenue given the extended weakness across the semiconductor industry, but partially cushioned by the weaker ringgit against the US$. On a sequential basis, core net profit was up 50% due to better product mix, higher interest income and lower effective tax rate. For the full-year, core net profit declined 67% to RM81.3m, short of our expectation at 89% of our estimate, with the variation coming from weaker-than-expected revenues.

Management highlighted new key projects kicking in by 2HFY24F

At Unisem’s analyst briefing today (27 Feb), management highlighted several new key projects by a number of customers involved in various end-segments as possible earnings drivers ahead. It said the primary growth contributor could come from power management applications for electric vehicles (EV) and artificial intelligence (AI). The group is currently expanding its Chengdu plant (phase 3) to cater to various upcoming projects in different qualification stages, with a substantial ramp up likely happening by 2Q24F. Moreover, its exposure to backend solutions for radio frequency front-end (RFFE) should benefit from the growth in China handset shipment units. Unisem could also benefit from the China Plus One angle as more production lines are set up in Malaysia for both existing and new customers, it added. These could drive its 13% US$ revenue growth we projected for FY24F, following the 22% decline in FY23, as utilisation rate improves. All in, Auto/EV and data centres are two focus growth segments for Unisem, while consumer/mobile remains a steady yet important space that Unisem will still commit to, given its size (55% of FY23 revenue), it said. Unisem plans to incorporate its wafer-level chip scale packaging technology, commonly used in the mobile segment, into auto/industrials to obtain more design wins.

Reiterate Reduce due to steep valuations

Despite expecting strong EPS recovery for Unisem in FY24-26F, we reiterate our Reduce call in view of its steep valuations. Our GGM-derived TP is unchanged at RM2.00. The stock is trading at 33.0x FY24F P/E, well above its 9-year mean of 21.7x and pre- pandemic (FY15-19) mean of 17.9x. De-rating catalysts include: 1) prolonged weakness and inventory adjustment in the mobile segment, 2) slowdown in China’s semiconductor industry resulting in weak utilisation rate in its Chengdu operations, and 3) the ringgit appreciating sharply vs. the US$. Upside risks are stronger-than-expected demand from mobile and automotive segments, and rapid expansion of its clientele base.

Source: CGS-CIMB Research - 28 Feb 2024