Unisem (M) - Not Good Enough For Now

kiasutrader

Publish date: Mon, 13 Aug 2012, 09:22 AM

After missing targets, we are slashing FY12/FY13 net profit estimates for Unisem by 96%/43% respectively. We also pegged the stock to 0.8x FY13 P/NTA, reverting to a 40% discount to the historical five-year sector average of 1.4x to derive a FV of RM1.21. There is foreseeable further downward pressure on its share price in the short-term due to negative market sentiment, and we advise investors to accumulate the stock only at lower levels. For now, we downgrade the stock to a NEUTRAL.

Flat growth for 3Q. After attending the company's analyst briefing last Friday, we were taken aback to hear its management guiding flat q-o-q revenue growth in 3Q2012, citing a challenging operating environment in 2H2012. Unisem's 3Q is traditionally stronger q-o-q. It also foresees not being able to wipe off 1H2012's cumulative losses. Initial expectations were to see a recovery in the last quarter, followed by stronger growth momentum for the rest of the fiscal year. However, its 2Q2012 results were disappointing, missing our and consensus estimates.

Brighter prospects in Chengdu. Unisem's Chengdu operations have broke even and the management is optimistic over its future revenue contribution. Over the previous quarter, the facility kicked off wafer bumping and wafer level chip scale packaging (WLCSP) works for Amalfi, Silego and AWN. It is still awaiting full wafer bumping qualification work orders from Texas Instruments. The company aims to increase their flip chip bumping capacity to 35m units by September.

A 15% increase in ASP for leaded packages. Back in Ipoh, management freed up space by consolidating Departments 1 & 2 for future WLCSP and Modules works. They also notified a few major customers of a 15% increase in average selling prices (ASP) for selected leaded packages, effective 1 Jan 2013. It still remains to be seen whether customers are agreeable to the new terms, though we believe they will be compliant with the price change as these are basically legacy products and they may face a price increase in switching over to competitors anyways.

Looking to further curb margin erosion. Unisem's management is currently analysing its profitability by packages and by customers in Batam, similar to what has been done in its other regional operations. They will unhesitatingly drop unprofitable customers, and have trimmed its customers to only 100+, from a previous 300+. The Batam operation focuses its services on the auto segment and there were reports from major auto suppliers claiming excess inventory build-up. Management will monitor the situation and allocate resources accordingly.

Capex spending to ramp up. The company said they will rev up spending in 2H2012 to bring its full-year capex toRM150m-RM160m. It spent RM50.9m in the previous half-year. As highlighted, it is looking to increase its flip chip bumping capacity in Chengdu to 35m units as it is already operating at a full utilization rate.

FV revised to RM1.21, downgrade to NEUTRAL. We are slashing our FY12/FY13 net profit estimates by 96%/43% respectively. Even though management is doing the right things to improve its gross profit margin, depreciation charges (YTD: +7% y-o-y) and interest expenses (YTD: +38% y-o-y) will likely be key culprits dragging down bottom lines in the near term. The stock, now downgraded to a NEUTRAL, is pegged to 0.8x FY13 P/NTA, reverting to a 40% discount to the historical five-year sector average of 1.4x to derive a FV of RM1.21. We remain cautious on the global macroeconomic environment as the recovery of US and Europe markets are still uncertain, plus China is only beginning to show signs of slower economic growth.

Source: OSK

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