Unisem’s 9M20 core net profit of RM82m (+>100% YoY) matched ours but exceeded consensus. Without Batam’s drag, it is operating at improved efficiency and favourable product mix yielding margin expansions. 4Q20 outlook is guided to be flattish QoQ due to fewer workdays and year-end inventory control. Future sales split between Ipoh and Chengdu is projected to be 45:55 and it may eventually expand Gopeng plant While forecast is unchanged, we lift its PE multiple to 25x of mid-FY22 EPS leading to a higher TP of RM5.21. As such, stock rating is upgraded to BUY.

In line with HLIB but exceeds street. 3Q20 core net profit of RM55m (+63% QoQ, +>100% YoY) brought 9M20 sum to RM82m (+>100% YoY), matched our full year forecast at 61% but surpassed consensus at 84%. One-off items include forex loss (RM4.7m), slow moving inventories provision (RM176k) and grant income (RM1.1m)

Dividend. Recommended a second interim tax-exempt dividend of 2.0 sen (3Q19: 2.0 sen) per share which goes ex on 9 Nov. YTD DPS amounted to 4.0 sen (9M19: 4.0 sen). Unisem intends to maintain distribution tradition of 3x every FY.

QoQ. Despite unfavourable forex (3Q20: RM4.20/USD vs 2Q20: RM4.32/USD), top line gained 15% on the back of higher sales volume achieved (microphone and automotive/TPMS). In USD term, sales expanded by 19% to USD85m. In turn, core net profit rose surged 63% to RM55m thanks to improved economies of scale and lower effective tax rate (3Q20: 11% vs 2Q20: 18%).

YoY. Partly aided by stronger forex (3Q20: RM4.20/USD vs 3Q19: RM4.16/USD), top line gained 13% compared to 12% growth in USD terms, mainly driven by higher sales volume even without Batam. From continuing operations, sales actually strengthened 23% (22% in USD term). For the same reasons above and without the drag from loss-making Batam, bottom line saw an uplift of >100% to RM55m.

YTD. Revenue inched up 1% to RM941m despite Batam’s cessation. But excluding Batam, sales gained 11% (8% in USD term) supported by robust demand. Core earnings more than doubled to RM82m on the back of better efficiency and favourable product mix yielding margin expansions.

Operations. 3Q20 utilization rate was 70-80%. Bumping and wlCSP was lower at 60- 70% but expected to improve. Chengdu’ was at 100%. Sales split between Ipoh and Chengdu was 50:50.

Outlook. 4Q20 is expected to be flat QoQ due to fewer workdays (China’s Golden Week) and year-end inventory control. Order visibility is now extended till 1Q21. Main product / drivers: (i) high-end microphone with good SNR; (ii) 5G infra using GaN; (iii) PA modules MCMs; (iv) 5G handset power management and chargers; (v) RF switches and DC-DC power devices for Chinese 5G phones; (vi) American 5G phone; (vii) data centre; and (viii) recovery in TPMS. Future sales split between Ipoh and Chengdu is projected to be 45:55 and it may eventually expand Gopeng plant.

Forecast. Unchanged as results were in line. Upgrade to BUY on the back of higher TP of RM5.21 (from RM4.17) after raising PE multiple from 20x to 25x, pegged to mid-FY22 EPS. Despite trade war and Covid-19 risks, Unisem’s prospects has improved with (1) closure of loss-making Batam plant; (2) favourable forex; (3) gradual synergistic relationship with TSHT; and (4) healthy balance sheet. Management is committed to solve the public shareholding spread issue before 31 Dec dateline which may lead to potential share price overhang.

Source: Hong Leong Investment Bank Research - 2 Nov 2020