• Demand remains robust, in tandem with the strength seen in the sector. 4Q20 core earnings rose 22% qoq
• Although FY20 EBITDA margin was weaker, impacted by the pandemic in 1Q20, full-year core profit more than doubled to RM150m driven by revenue and margin expansion. Earnings are 9-14% above our and street estimates
• We lift the 2021-22E EPS by 9% and raise our TP to RM9.26 but keep our HOLD rating on the stock

FY20 Results Above Expectations

Unisem’s FY20 core profit of RM150m (+141% yoy) was driven by a combination of 12% revenue growth yoy, margin expansion (+4.1ppts yoy to 26.4%) and a sharp reduction in losses due to the discontinuation of its loss-making Batam operations isince March 2020. Notably, Unisem posted a loss in 1Q20, but has subsequently seen strong sequential improvement driven by both revenue and margin expansion. Overall, the results surprised positively as FY20 core earnings accounted for 109% and 114% of our and street estimates, respectively. The surprise was largely due to the better-than-expected EBITDA margin of 26.3%, which was ahead of our forecast of 25.4%. Unisem also announced a 6 sen DPS, unchanged from FY19.

4Q20 Core Earnings Improved 22% Qoq

Although 4Q20 revenue only increased by 2% sequentially, core profit increased by a faster 22% due to the 0.7ppts qoq improvement in the EBITDA margin combined with a lower effective tax rate during the quarter. On a yoy basis, the 4Q20 EBITDA margin was up 8.7 ppts largely due to operating leverage and also the revenue mix. Revenue has skewed more towards the leadless, wafer level packaging and testing businesses vis-à-vis the leaded business.

Maintain HOLD But With a Higher 12-month TP of RM9.26

We adjust the 2021-22E EPS after updating for the FY20 financials. Our fair value is raised to RM9.26 (from RM8.50) based on an unchanged target PE multiple of 34x on CY21E EPS. The target PE is at a 30% discount to market leader Inari’s (INRI MK, RM3.64, BUY) fair PE of 49x and in line with that of its peer MPI (MPI MK, RM38.0, BUY. With 3% upside to our target price, we maintain our Hold rating. Key risks include better/weaker demand, firmer/weaker RM against the US$ and gain/loss of customers.

Source: Affin Hwang Research - 26 Feb 2021