Unisem recorded 1QFY20 NL of RM2.3m (vs. our forecast/consensus of RM100m/RM86m for FY20), owing to a final expense incurred for the last phase of the Batam plant closure. In addition, the MCO period also caused a slight slowdown in output due to limited workforce. We took into account such factors and cut FY20E-21E CNP by 10% each to RM90.3-111.2m. Upgrade to MARKET PERFORM but with a lower TP of RM1.80 (previously RM2.00).

Below expectations. Unisem recorded 1QFY20 NL of RM2.3m (vs. our forecast/consensus of RM100m/RM86m for FY20), owing to a final expense incurred for the last phase of the Batam plant closure. In addition, the MCO period also slowed down output slightly due to limited workforce.

YoY, 1QFY20 revenue fell 9.8% YoY to RM273.3m (USD terms: - 11.4%), due to lower contribution from the Batam plant that was finishing up some final orders before officially ceasing operations on 31 Mar 2020. This was further exacerbated by the movement control order (MCO) in Malaysia which resulted in limited workforce and extra overtime expenses incurred to entice plant operators to return to work. While the company was operationally profitable at RM1.16m, it was entirely offset by higher interest expense and higher tax provision which resulted in a net loss of RM2.3m.

Starting with a clean slate. Subsequent quarters will most likely return to the black as there will not be any more lumpy expenses related to the closure of its Batam plant. All costs have been recognised in the past three quarters. There are still 13 workers in the Batam plant that is handling the relocation of the equipment to Chengdu and Ipoh plants to cater for additional capacity. The group expects to vacate the Batam plant by end-June 2020.

The 100% workforce approval announced by the government on 28 Apr provides a breath of fresh air as the company can now focus on delivering its piling backlog orders. Currently operating at 80%, it expects to increase this gradually as it will still practice working from home for administrative employees. While there is little change in terms of the types of chip packages requested, the group is anticipating more demand from the communication (driven by the increase in 5G base stations) and consumer segments (supported by higher demand for true wireless stereo).

We adjusted FY20E-21E CNP lower by 10% each to RM90.3- 111.2m, factoring in the slowdown during the MCO.

Upgrade to MARKET PERFORM but with a lower TP of RM1.80 (from RM2.00) based on FY20E PER of 14x, in line with the group’s 3- year mean. The upgrade is to reflect the decline in its share price meeting our rating definition. While we are positive that the losses have come to an end, we prefer to remain cautious for now as there are better options out there in the same space.

Risks to our call include: (i) stronger-than-expected USD/MYR, (ii) faster-than-expected adoption of 5G, and (iii) a resolution of the trade war.

Source: Kenanga Research - 30 Apr 2020