Unisem’s 1Q20 core net loss of -RM6m missed expectations due to Covid-19 disruptions in Ipoh and Chengdu. Batam has finally ceased its loss-making operation. 2Q20 is expected to improve sequentially thanks to the backlog from 1Q20. Microphone demand is robust but automotive remains soft. Unisem will approach 2H20 cautiously as it sees risks in supply chain / demand and will manage capex to conserve cash. After lowering estimates, our TP is cut to RM1.74, pegged to 15x of FY21 EPS. Maintain HOLD.

Below expectations. 1Q20 core net loss of -RM6m (4Q19: RM30m, 1Q19: RM8m) was a disappointment, against HLIB and consensus full year earnings projections of RM88m and RM86m, respectively. The shortfalls were lower-than-expected top line and EBITDA margin. One-off adjustments include inventories write down (RM1.4m), slow moving stocks (RM55k), grant income (RM720k) and forex gain (RM4.3m).

Dividend. None (1Q19: none). Management intends to maintain distribution tradition of 3 times every FY.

QoQ. Top line fell 15% mainly due to Covid-19 disruptions in Ipoh and Chengdu while winding down the Batam plant. As forex was relatively stable, sales also fell by 15% in USD term. In turn, core net loss of -RM6m (4Q19: +RM30m) was recorded on the back of margin deterioration as capacity was left idle. Despite the plant shutdowns, Unisem did not furlough employees and fixed costs continued to weigh on profitability.

YoY. Aided by stronger forex (1Q20: RM4.17/USD vs 1Q19: RM4.09/USD), top line was lower by 10% compared to 11% decline in USD term. For the same reasons above, bottom line fell into losses with -RM6m (1Q19: +RM8m).

Covid-19 disruptions. Chengdu plant was closed for 2 weeks in 1Q20 and has resumed production with strong demand till end of 2Q20. As for Ipoh plant, it was shut since 18 Mar and only restarted with 50% capacity since 17 Apr. With the easing measures announced yesterday, Ipoh is now operating at 80% with strong backlog till 2Q20 for 5G infra / portables and power management. No major supply issue though there was minor hiccups to source 4-5 items (leadframe) from red zones in Johor.

Batam. Finally ceased operation on 31 Mar and will let go 780 staff (out of 6.8k as end of 1Q20) in April with another 13 employees in May. No one-off item was incurred in 1Q20 as well as in 2Q20 relating to this since all were provided for in 2H19. Will serve Batam clients from both Ipoh and Chengdu plants.

Outlook. Automotive (including TPMS) demand remains soft reflecting global trends. Microphone order is robust supported by strong wireless earbuds sales. Will approach 2H20 with caution as it sees risks in supply chain disruption and demand changes. To conserve cash, it will revisit capex plan and explore co-funding options with clients. Expansion plan with new Gopeng plant is now put on hold. Expect 2Q20 revenue to improve sequentially.

Forecast. After cutting sales and margin assumptions, our FY20-21 EPS are cut by 33% and 14%, respectively. Maintain HOLD on the back lower TP of RM1.74 (from RM2.02), reflecting downward revision in earnings. Our TP is pegged to 15x of FY21 EPS. Despite trade war and Covid-19 risks, Unisem’s prospect is likely to improve with the (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 - 30 Apr 2020