Unisem’s FY19 core net profit of RM70m (-19% YoY) beat expectations. This outperformance can be attributed to improved cost structure amid winding down of Batam plant. Batam is on track towards cessation while Covid-19 outbreak impact on its Chengdu plant is manageable. We upgrade the stock to HOLD with TP of RM2.02, pegged to 15x of FY21 EPS. Since our last downgrade in Feb 2019, share price has fallen by 28%. Aside from the risk of being delisted, we think that Unisem’s prospect has improved one the back of (1) closure of loss-making Batam plant; (2) strengthening USD; (3) gradual synergistic relationship with TSHT; and (4) healthy balance sheet.

Exceeds expectations. Despite the reported loss, 4Q19 core was profitable with RM30m (+44% QoQ, +33% YoY), this brought FY19’s total to RM70m (-19% YoY), forming 113% and 17% of HLIB and consensus full year forecasts, respectively. The outperformance can be attributed to improved cost structure amid winding down of Batam plant. One-off adjustments in 4Q19 include Batam’s severance cost (RM27m), PPE impairment (RM25m), inventory write down (RM10m), forex loss (RM4m), loss allowance on trade receivables (RM2m), grant income (RM 2m), reversal of retirement benefits (RM11m) and provision for slow moving inventories.

Dividend. Recommended a final tax-exempt dividend of 2.0 sen per share (4Q18: 3.0 sen) which subject to shareholders approval at the forthcoming AGM. YTD dividend amounted to 6.0 sen (FY18: 7.5) sen per share, above our earlier expectation.

QoQ. In line with industry wide recovery, 4Q19 turnover gained 1% even as Batam began to wind down. As forex was relatively stable, sales also expanded 1% in USD terms, in line with earlier guidance. Core net profit grew by 44% attributable to the scaled-down loss-making Batam and favourable product mix as sales contributions from higher-margin wafer-level and bumping products added 2ppt to 35%.

YoY. Top line was 4% lower mainly attributable to the decrease in sales volume. In USD term, revenue declined by 3%. However, core earnings gained by 33% for the same reasons mentioned above despite higher D&A.

FY19. Partly cushioned by the USD appreciation (FY19’s RM4.14/USD vs FY18’s RM4.04/USD), revenue fell by 7% to RM1.3bn in line with global market trend. In USD term, it fell by 10% to USD302m. In turn, this has led to the decline in core earnings by 19% to RM70m.

Outlook. Batam is on track for complete cessation by end of 1Q20 with 800 staff off its P&L. Equipment will be relocated to Chengdu and Ipoh. Covid-19 has caused Chengdu plant to lose 8 production days and is operating at 70% utilization rate. Facing minor sourcing (leadframe and epoxy) issues across the group. Ramp in microphone is at a pace of 3m units/month on the back of 5m units/month capacity.

Forecast. Update model with latest financial figures and capex guidance. In turn, FY20-21 EPS are lifted by 4% and 1%, respectively. Upgrade to HOLD on the back of marginally higher TP of RM2.02 reflecting our minor upward revision in earnings. Our TP is pegged to 15x of FY21 EPS. Since our last downgrade in Feb 2019, share price has fallen by 28%. Despite the lingering trade war concern along with Covid-19 pandemic risk, we think that Unisem’s prospect has improved one the back of (1) closure of loss-making Batam plant; (2) strengthening USD; (3) gradual synergistic relationship with TSHT; and (4) healthy balance sheet. However, the potential of being delisted remains should it fail to meet the public shareholding spread.

Source: Hong Leong Investment Bank Research - 27 Feb 2020