Unisem recorded 2QFY20 NP of RM34m (+138% YoY), bringing 1HFY20 CNP to RM31m (+54.8% YoY), representing 35% and 45% of our and street’s estimates, respectively. 2QFY20 revenue increased 13% QoQ on higher loading volume from both its Ipoh and Chengdu plants. With the closure of its loss-making Batam plant completed, the group expects a healthy recovery momentum in the 2H on the back of higher orders for RF packaging and MEMS microphone. We maintain FY20E CNP at RM90.3m but tweak FY21E CNP higher by 4% to RM115.7m. Maintain MARKET PERFORM with a higher TP of RM3.00.

Within expectations. Unisem recorded 2QFY20 CNP of RM34m (+138% YoY), bringing 1HFY20 CNP to RM31m (+54.8% YoY), representing 35% and 45% of our and street’s estimates, respectively. We deem the results within expectation as we anticipate a stronger 2H on the back of higher orders in its Ipoh and Chengdu plant. Thanks to the closure of its loss-making Batam plant, the group managed to return to the black.

YoY, 2QFY20 revenue was flat. However, stripping out the discontinued Batam operation shows that revenue rose 13% to RM310.1m (USD terms: +17%). Unisem was able to resume to 100% workforce since 28 Apr and is experiencing higher loading volumes from both its Chengdu and Ipoh plants. The group is seeing orders resuming to healthy levels with production for key products (leadless packaging) running at 80- 90% utilisation rate.

Full steam ahead. Unisem has shown strong profitability post-closure of its Batam plant and expects the momentum to continue in 2HFY20 driven by higher volume for RF packaging and MEMS microphone from key customers, in tandem with the ramp-up of 5G adoption in handsets and higher demand for true wireless stereo (TWS). The latter is expected to continue its growth momentum with the implementation of active noise cancelling feature which requires more MEMS microphones in each pair to achieve better signal-to-noise (SNR) ratio. The group has also relocated most of its machinery from Batam to Ipoh and Chengdu to cater for more orders.

While the automotive segment is weak this quarter, the group is seeing a healthy pickup in 2HFY20 for tire pressure measuring system (TPMS), and not just for new vehicles but also for the replacement market. In addition, the group’s 12-inch wafer fab is actively going through qualification process by four potential customers. Operations are expected to commence by 4QFY20 or 1QFY21.

We maintain FY20E CNP at RM90.3m as we expect stronger 2H. Tweaked FY21E CNP higher by 4% to RM115.7m to factor in improving prospects and better margins after the closing down of the loss-making Batam plant.

Maintain MARKET PERFORM but with a higher TP of RM3.00 (from RM1.80) based on rolled forward FY21E PER of 18.8x (previously 14x) at +0.5SD the group’s 5-year mean. The upgrade in PER is to reflect improving prospects and better margins as the group is starting over with a positive trajectory following the closure of the loss-making Batam plant.

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

Source: Kenanga Research - 4 Aug 2020