• 2Q20 earnings rebounded sharply after the lockdowns. Due to the strong revenue, EBITDA margin jumped 9ppts qoq. But margins are not comparable to past performance as the financial statements exclude the loss-making Batam operations, which ceased operations in March 2020
• Results were above expectations and we raise FY20-22E EPS
• Stock price has gained 46% over the past month and has largely reflected the improved financial performance. Trading near its 5-year mean PE, risk reward is fair. Maintain HOLD

Sharp rebound in 2Q20 earnings

Unisem posted a very strong 2Q20 core profit of RM34m, rebounding sharply from the loss in 1Q20 and up 157% yoy from 2Q19. 2Q20 revenue jumped 22% qoq, off a low base in 1Q20 which was partially affected by the Movement Control Order (MCO) in mid-March. In spite of this, revenue was extremely strong in our view and likely due to unfulfilled production pushed into 2Q20. As a result of operating leverage, this is likely to have helped push EBITDA margin to its highest level in recent times. 2Q20 EBITDA margin jumped 9.3ppts qoq to 26.8%. EBITDA margin is however no longer comparable to previous years as the company restated its financial statements to exclude the Batam operations, which ceased operating on 31 March 2020.

6M20 results positively surprised

As we had earlier expected Unisem to post a full-year loss of RM7m, the sharp rebound in 2Q20 earnings, resulting in 6M20 core profit of RM27m (+41% yoy), was a positive surprise to us and likely the street. The main variance versus our forecast was better-than-expected revenue and margins. We raise our FY20-22E EPS forecast by >100% largely due to the low base.

Maintain HOLD with a higher 12-month TP of RM3.33

Stock price has appreciated 46% over the past month, and has largely reflected the improved financial performance. At 17x, 2021E EPS, stock is trading near its 5-year mean PE of 18x and looks fairly valued. Our target price is raised to RM3.33, based on a target PE of 18x (previously based on a mean P/B of 1.1x). Maintain Hold. Key risks include better/weaker demand, firmer/weaker RM against the US$ and gain/loss of customers.

Source: Affin Hwang Research - 4 Aug 2020