Results

After one-off adjustment of RM10.4m, 1Q14 almost broke even with a core net loss of RM0.1m. We regard this to be largely in line as we are expecting Unisem to turnaround starting 2Q14.

Deviations

Largely in line while acknowledging a significant EBITDA margin improvement.

Dividends

None.

Highlights 

Saw pick-up in demand and opportunity in bumping, 8in and 12in wlCSP from new and current customers:

3 more in development for 2H14; and

3 new accounts in 1Q14 ramping.

Expects ramp up of <0.33mm QFN designs for new generations of smartphones in 2H14 on the back of solid 4G proliferation in China.

Demand for power management chips also strengthened to support the emerging technology of Internet of Things (IoT). Automotive continue to be steadily increasing.

Initial P&L for Batam plant shows effectiveness of manpower right sizing initiatives. Headcount has further shrunk to 6.9k from 8.0k a year ago.

Overall utilization rate was relatively unchanged qoq, at circa 60% although WLCSP / flip-ship product lines were running at more than 80% of capacity.

Guidance: Expect 8-10% yoy growth in the quarters ahead.

Catalysts

• Improved consumer confident.
• Technological advancement and creation of new electronics applications.

Risks

FOREX, weak consumer demand, continuous drag by Batam’s performance.

Forecasts

Tweaked cost model to reflect margin improvement as a result of fruitful transformation strategy. In turn, FY14-16 EPS was raised by 249.0%, 105.1% and 72.6% respectively.

Rating

BUY, TP: RM1.65

Positives – Appreciation of greenback, proliferations of smartphones, tablets, wearable techs and hybrid / electric automobiles.

Negatives – intense competition from Taiwanese peers, higher input costs, challenging economic outlook which will eventually hampers consumer confident and stalemate in electronics innovation.

Valuation

Rolled over our valuation based year to FY15 and raised fair value by 39.8% from RM1.18 to RM1.65. Valuation is based on 1SD above historical average P/B of 1.13x (previous’ 0.83x of FY14 book) FY15 book per share (see Figure #7) as Unisem is poised to turnaround going forward.

Upgrade stock rating from HOLD to BUY as new TP offers 30% upside to last closing price.

Source: Hong Leong Investment Bank Research - 9 May 2014