Unisem’s headline losses widened in 4Q19 due to the restructuring charges at its Batam operation, which is expected to shut down by 1Q20. Management expects the Batam operation to be fully wound down by end-March 2020 and guided that there will be no further cost related to Batam this year. Revenue and EBITDA registered sequential growth in 4Q19, due to a pick-up in activities while the absence of lossmaking Batam aided profitability. Nevertheless, we trim the 2020-21E EPS by 1-3% due to the impact of Covid-19 that will likely take a toll on global growth and hence demand. Management remains cautious on 1H20 and warned of supply disruptions. Its Chengdu factory had restarted operations on 10 Feb, but utilisation has yet to return to optimal levels. We maintain our SELL rating with a slightly lower 12- month TP of RM1.73 (on an unchanged PE of 15x on 2020E EPS).

4Q19 Headline Loss Widens as Batam Is Wound Down

Headline losses at Unisem expanded to RM27m in 4Q19 due to further oneoff charges at its Batam operation, which is being gradually wound down and expected to fully shut down by 1Q20. 4Q19 core net profit of RM35m (+67% qoq) showed an improvement on the back of better revenue and profitability.

2019 Core Earnings Above Expectations

Excluding the one-offs from Batam, the core profit was still lower by 27% yoy largely due to weaker revenue as Unisem was impacted by the Huawei ban, aside from the inventory correction and hence weaker demand. Overall, earnings were, however, above our expectations due to better-thanexpected margins. The 2019 EBITDA margin improved 0.7ppts yoy, likely due to a better product mix but also the declining impact of loss-making Batam.

Maintain SELL With Lower TP of RM1.73

In view of the anticipated slowdown in global growth because of Covid-19, we trim our 2020-21 EPS forecasts by1-3% to reflect disruptions in the supply chain and also weaker overall demand. Earnings risk remains to the downside should this epidemic continue. We maintain our SELL rating with a lower target price of RM1.73 (based on an unchanged 5-year mean PE of 15x on the 2020E EPS). Key upside risks: a sharp depreciation of the RM, which will positively impact earnings, increased outsourcing opportunities, and shareholder Huatian Technology increasing business flows to Unisem.

Source: Affin Hwang Research - 27 Feb 2020