Unisem’s 2Q20 core net profit of RM34m exceeded expectations thanks to robust sales and margin improvement. Without Batam’s drag, it is operating at improved efficiency and favourable product mix yielding margin expansions. 2H20 outlook is guided to be strong supported by products including 5G infra / handset, microphone, power amplifier, data centre and TPMS. UAT’s 12” wafer bumping qualification is underway. After lifting estimates, our TP is raised to RM3.13, pegged to 20x of FY21 EPS. Maintain HOLD.

Above expectations. 2Q20 core net profit of RM34m (1Q20: -RM6m, +213% YoY) brought 1H20 sum to RM27m (+43% YoY), which exceeded expectations accounting for 46% and 39% of HLIB and consensus full year forecasts, respectively. The outperformance was attributed by stronger-than-expected top line and EBITDA margin. One-off adjustments include provision for slow moving inventories (RM46k), grant income (RM476k) and forex gain (RM64k).

Dividend. Recommended an interim tax-exempt dividend of 2.0 sen (2Q19: 2.0 sen) per share which goes ex on 17 Aug. Unisem intends to maintain distribution tradition of 3 times every FY.

QoQ. Despite Batam’s closure, top line gained 13% on the back of favourable forex and higher sales volume achieved with the resumption of normal production post Covid-19 lockdown. In USD term, sales expanded by 9%. In turn, core net profit rose by more than 6-folds to RM34m without the drag from loss-making Batam and margin improvement thanks to better economies of scale.

YoY. Even with stronger forex (2Q20: RM4.32/USD vs 2Q19: RM4.15/USD), top line was lower by 1% compared to 5% decline in USD term, mainly due to the absence of Batam contribution. From continuing operations, sales actually strengthened 10% (6% in USD term) as sales volume surged. For the same reasons above, bottom line saw an uplift of more than 3 times to RM34m.

YTD. Revenue dipped 5% mainly due to Batam’s cessation. But excluding Batam, sales gained 4% (1% in USD term) supported by robust demand. Core earnings rose 43% to RM27m due to better efficiency and favourable product mix yielding margin expansions.

Operations. Batam’s equipment has been relocated to Ipoh and Chengdu. Utilization rates for leaded: 50%, bumping and wlCSP: 60%, leadless and test: 80-90%. Sales split between Ipoh and Chengdu at 55:45.

Outlook. Demand is strong into 2H20 after consistent loading in May and June for both Ipoh and Chengdu. This is driven by (1) high end microphone with good SNR; (2) 5G infra using GaN products; (3) PA modules MCMs; (4) 5G handsets power management and chargers; (5) data centre products; and (6) recovery in TPMS. Four customers are currently qualifying UAT’s 12” wafer bumping.

Forecast. After revising sales and margin assumptions, our FY20-22 earnings are lifted by 75%, 35% and 32%, respectively.

Maintain HOLD on the back of higher TP of RM3.13 (from RM2.32), reflecting upward revision in earnings. Our TP is pegged to 20x of FY21 EPS. Despite trade war and Covid-19 risks, Unisem’s prospect is likely to improve with the (1) closure of lossmaking Batam plant; (2) strengthening USD; (3) gradual synergistic relationship with TSHT; and (4) healthy balance sheet. However, share price overhang is a potential risk should TSHT dispose partial holdings to meet public spread requirement.

Source: Hong Leong Investment Bank Research - 4 Aug 2020