Strengths Sustain Into 3Q20

• 9M20 results positively surprised as results constituted 85% and 91% of street and our full-year estimates
• While earnings momentum continues positively post economic lockdowns, we believe that inventory building is rampant in view of a potential round of further lockdowns
• We lift 2020-22E EPS by 13-52% and raise our TP to RM4.25 but keep our HOLD rating on the stock

9M20 Results Positively Surprised

Unisem’s 9M20 core profit of RM83m (+107% yoy) was driven by revenue growth and a sharp reduction in losses due to the discontinuation of its loss-making Batam operations since March 2020. Overall results positively surprised as 9M20 core earnings accounted for 85% and 91% of street and our full-year forecasts. The variance was largely attributed to stronger-than-expected revenue but particularly its EBITDA margin. 9M20 EBITDA margin of 25% was above our previous full-year forecast of 21%. We believe that we had underestimated the effects of the drag from its Batam operations, and thus raise our 2020-22E EPS by 13-52%

3Q20 Core Earnings Jump 64% Qoq

3Q20 revenue and core earnings jumped 15% and 64% qoq respectively. Revenue growth is likely to have been underpinned by improved productivity levels post lockdowns. However, we suspect that inventory building within the supply chain is likely to have also contributed to the sustained revenue momentum and margin expansion. 3Q20 EBITDA margin improved by 2.1ppts qoq, underpinned by improved product mix – wafer level packaging and testing business.

Maintain HOLD With a Higher 12-month TP of RM4.25

Near-term earnings momentum is likely to remain firm, underpinned by inventory build over the near term. Management has also guided for a flattish revenue growth going into the final quarter. Although we are expecting another 33% EPS growth in 2021E, we think this is already in the price. Currently trading at 17.2x CY21E EPS, slightly above its 5-year mean PE, we think risk/reward is fair. Our target price is raised to RM4.25 based on an updated 5-year mean PE of 17x and on CY21E EPS (previously RM3.33 based on 18x CY21E EPS). Maintain Hold. Key risks include better/weaker demand, firmer/weaker RM against the US$ and gain/loss of customers

Source: Affin Hwang Research - 26 Oct 2020