3QFY20 NP of RM51m (vs. 3QFY19 NL of RM3.2m) performed above expectation, bringing 9MFY20 CNP to RM82m (+373% YoY). This represents 91% and 84% of our and street’s estimates. QoQ, 3QFY20 NP jumped 50% outpacing the 15% increase in revenue, mainly attributed to the stronger demand for MEMS microphones and TPMS. The group expects the momentum to continue going into 4Q thanks to strong demand for: (i) MCM PA owing to the recent launched US 5G smartphone, (ii) MEMS microphone due to increased adoption of TWS and home assistant speaker, and (iii) TPMS thanks to the V-shaped recovery in China auto sales. We raised FY20-21E CNP by 23-41% to RM110.7-163.6m. Upgrade to OUTPERFORM with a higher TP of RM5.15.

Above expectations. Unisem recorded 3QFY20 CNP of RM50.7m (vs. 3QFY19 NL of RM3.2m), bringing 9MFY20 CNP to RM82m (+373% YoY), representing 91% and 84% of our and street’s estimates, respectively. The results came in above expectation owing to a surge in orders in both its Ipoh and Chengdu plants. The closure of its loss- making Batam plant also freed up resources for Unisem to focus on higher margin products.

YoY, 3QFY20 revenue increased 13.1% to RM357.7m (+22% in USD terms to US$85.1m), as the group experienced higher loading volumes for its leadless packaging and wafer level bumping service without the loss-making Batam plant weighing the group down. Cumulatively, 9MFY20 NP soared 373% as EBIT margin improved 5.4ppt to 11% while NP margin rose 7ppt to 8.9%. QoQ, 3QFY20 NP jumped 50% on a 15% increase in revenue, mainly attributable to the increased demand for Micro-Electro-Mechanical System (MEMS) microphones and tire- pressure monitoring system (TPMS).

Strong momentum to continue. The group expects the momentum to continue going into 4Q as order pipeline remains healthy. Its Chengdu plant is operating at 100% utilisation rate while the Ipoh plant is currently running above the 80% mark. With per-orders of the recently launched US 5G smartphone recording a 2.5x increase from its predecessor model, Unisem is receiving more orders for multichip module (MCM) power amplifier (PA), particularly for the sub-6 RF segment. Besides that, demand for MEMS microphone remains strong thanks to increased adoption of true wireless stereo (TWS) and virtual assistant speakers for households. Also, the group’s tone towards the automotive segment has turned positive as demand for TPMS is seeing a strong recovery, mainly from China as it recorded 5 months of consecutive growth in car sales to plot a strong V-shaped rebound.

We raised FY20E-21E CNP by 23-41% each to RM110.7-163.6m to factor in the ramp-up in orders and better margins after the closing down of the loss-making Batam plant.

Upgrade to OUTPERFORM with a higher TP of RM5.15 (from RM3.00) based on FY21E PER of 23x (previously 19x) at +0.5SD to the group’s 3-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) weaker-than-expected USD/MYR, (ii) slower-than-expected adoption of 5G, and (iii) worsening US-China trade war.

Source: Kenanga Research - 26 Oct 2020