Unisem is our Top Pick in the Semiconductor sector. We like Unisem for i) its new business model, which focuses on a lean manufacturing model and selecting the right customers, right technologies and right packages, ii) its move into  high-margin, high-growth products and iii) a rebound in its net earnings with a strong 2-year CAGR of 109% by FY13 (from RM19.7m to RM86.4m), riding on the industry up-cycle. We have revised up our FY12-13E earnings to RM60.0m-RM86.4m (from RM46.7m  and RM74.2m previously) based on our new in-house forecast forex rates of RM3.12 for CY12 and RM3.06 for CY13 accordingly. We continue to maintain an OUTPERFORM rating on Unisem with a new Target Price of RM1.87 (from RM1.86 previously) based on an unchanged FY13 forward PBV of 1.1x. 

Unisem 2.0.Unisem has changed its business model since FY11, which the management termed as Unisem 2.0, by focusing more on lean manufacturing and selecting the right customers, right technologies and right packages with higher margins. With the new business model, the group is scheduled to increase its product mix in advanced packaging (i.e. QFN and CSP) compared to traditional packaging (i.e. DIP and SSOP). Besides that, the group plans to reduce its number of clients from 288 now to 100 as Unisem prefers to have a strong customer base from overseas such as Broadcom, Qualcomm, Intersil, etc.

Earnings driven by the both higher growth and margin products. QFN, WLCSP and Flip Chip are expected to grow by 20%-30% p.a., 10%-15% p.a. and 10%-15% p.a., respectively, over the next 2 years, 5 years and 3 years respectively. All these packaging products are mainly used in mobile phones, tablets, MP3, digital cameras and computing. Another highgrowth product is wafer bumping, which is expected to grow by 5% in 2012 and to reach 26% in 2016. Unisem had started producing these advanced packaging products in 2011 and they accounted for 41% of the group's total turnover in FY11. Going forward, we expect these products to contribute 44% and 45% to the group's FY12-FY13 total turnover of RM1.25b and RM1.40b respectively. Margin-wise, these high-growth products are expected to generate 5%-10% higher margins than the existing products the group due to the lower raw material costs used on the high-growth products. Hence, these products are expected to gradually increase the group's gross profit margin to 57% in FY13 from 56% in FY11. 

Earnings boost by 2-year CAGR of 109%.  In tandem with the industry's rebound, we are maintaining our bullish  view on Unisem's net earnings, which we forecast to record a strong 2-year CAGR of 109% by FY13 (from RM19.7m to RM86.4m for FY11-FY13). The jump is due mainly to higher revenue as well as an enhancement of its profit margins. We are looking at a 2-year CAGR of 9.7% in revenue for the same period (FY11-FY13) while net margin will also improve from just 1.7% in FY11 to 6.2% in FY13 due to its cyclical nature. 

Raising FY12-FY13 earnings due to changes in forex assumptions. To align with our latest change in our in-house USD to RM forecasts (average rates of RM3.12 and RM3.06 for CY12 and CY13 respectively vs. RM2.90 and RM2.80 previously), we have raised our Unisem's FY12 and FY13 earnings forecast by 29% and 16% respectively. We are estimating FY12-FY13E net dividends per share of 6.0 sen and 9.0 sen respectively, translating to yields of 4.8% and 6.8%. Unisem has a higher dividend yield outlook compared to MPI, which is forecasted to have a 3.4% yield and a 6.7% yield in FY12 and FY13, respectively

Source: Kenanga