• 1Q21 Revenue Grew 2% Qoq Despite a Seasonally Weak Quarter
• Profits jumped 5-fold compared to a year ago on revenue and margin expansion. Results are in line, but 5-8% 2Q21 revenue growth guidance is upbeat
• Upgrading to BUY With 20% Upside to Our Revised TP of RM9.33

An Exceptionally Strong Quarter

Despite a typically weak quarter due to seasonal weakness, Unisem managed to grow its 1Q21 revenue on a sequential basis, which ended up 2% qoq. This was also Unisem’s strongest quarterly revenue since 3Q17, which has been driven by strong production volumes. However, at the core net profit level, earnings fell a sharp 34% qoq, largely due to the low effective tax rate in 4Q20 coupled with the RM7m gain from its discontinued operations. Hence, a better reflection of earnings, at the pretax level, indicates that earnings fell a more modest 7% qoq, largely due to the 3.5ppts qoq EBITDA margin contraction, a result of unfavourable product mix.

1Q21 Pretax Profits Are Up 5-fold, Within Expectations

Yoy, 1Q21 revenue grew 47% while pretax profit jumped 5-fold to RM53m, albeit from a low base last year due to the pandemic. 1Q21 EBITDA margins surged 8.6ppts yoy to 26% although this is off the high of 29-30% recorded in 3Q-4Q20, but still in line with our full-year forecast of 26%. Accounting for 22-23% of street and our FY21 profit estimates, we deem the 1Q21 results to be in line with expectations.

Upgrade to BUY With a 12-month TP of RM9.33

While stock PE valuations are trading at c. +1.5SD its 5-year historical mean, we think that interest in the sector will sustain given the global chip supply shortage which will bodes well for players such as Unisem, prolonging its order visibility while ensuring that utilisation levels remain high. That said, we expect sustained strong earnings momentum over the coming quarters. Our 2021-23E net profit is raised by between 7-17% after updating for a more favourable outlook in the subsequent quarters but EPS changes more muted after taking into account its recent share placement. Our fair value is lifted slightly to RM9.33 (from RM9.26) based on an unchanged target PE multiple of 34x on CY21E EPS or a 30% discount to market leader Inari’s (INRI MK, RM3.56, Buy) fair PE of 49x. With 20% upside to our target price, we raise our rating to BUY from a Hold. Key risks include weaker demand, firmer RM against the US$ and loss of customers.

Source: Affin Hwang Research - 28 Apr 2021