Unisem recorded 3QFY21 CNP of RM40.3m (-21% YoY; -26% QoQ), bringing 9MFY21 CNP to RM140.3m (+72% YoY) which came in below our/street expectation. Margins declined due to: (i) Ipoh plant closures (twice) in 3QFY21 totaling 18 days, (ii) higher depreciation, and (iii) higher expense incurred for staff vaccination via a private arrangement as the PIKAS program faced vaccine shortage. With currently >99% vaccination rate, the group is optimistic for QoQ growth in its upcoming 4Q as its Ipoh operation will run smoothly. Its Chengdu plant’s utilisation is currently already at its peak. Maintain OUTPERFORM with an unchanged Target Price of RM4.90.

Below expectations. Unisem recorded 3QFY21 CNP of RM40.3m (- 21% YoY; -26% QoQ), bringing 9MFY21 CNP to RM140.3m (+71% YoY) which came in below our/street expectation at 60%/64% of fullyear estimate.

QoQ, 3QFY21 CNP fell 26% to RM40.3m while revenue dipped 8.9% to RM366.4m as the group faced disruption in its Ipoh plant. Due to rising Covid-19 cases in the Pulai Jaya industrial estate in Perak, the Ministry of Health instructed Unisem to halt operations twice, on 26 July (for 11 days) and 8 September (for 7 days). In addition, the group had to incur more cost to vaccinate its workforce as the PIKAS programme faced vaccine shortage. As a result, the group’s EBIT margin and CNP margin fell by 2.4ppt and 2.6ppt to 13.3% and 11%, respectively. YoY, 3QFY21 revenue inched 2.4% higher to RM366.4m (+2.7% in USD terms to US$87.4m), thanks to robust demand for its packaging services, especially wafer level chip scale packaging. However, it was offset by unabsorbed costs resulting from the plant closure in Ipoh which led to a 21% decline in CNP. Cumulatively, 9MFY21 revenue was 24% higher at RM1.14b while CNP leapt 71% to RM140.3m.

Catching up on unfulfilled orders. Its operations in Ipoh made a net loss of RM5m, meaning that the entire 3QFY21 CNP was contributed by its Chengdu operations. However, with more than 99% of its entire workforce fully vaccinated, the group is positive to pick up on its backlog from the Ipoh plant (mainly the communication segment) in the upcoming 4Q as it returns to full workforce. Operations in its Chengdu plant remain strong as utilisation is currently at its peak due to robust demand from its automotive customers. Phase 3 expansion in Chengdu has commenced and will be completed by 4QFY22 which will double its current floor space in Chengdu.

Tweaked FY21E CNP by -10% to RM210.6m while maintaining FY22E CNP of RM254.8m as we anticipate the backlogs from the Ipoh plant to be fulfilled subsequently.

Maintain OUTPERFORM with an unchanged Target Price of RM4.90 based on FY22E PER of 31x (+1SD 3-year mean).

Risks to our call include: (i) weaker-than-expected USD/MYR, (ii) slower-than-expected adoption of 5G, and (iii) another major wave of Covid-19 lockdowns.

Source: Kenanga Research - 27 Oct 2021