UNISEM’s FY22 results met expectations. Despite lockdowns, its Chengdu, China plant achieved c.70% utilisation, cushioning impact from the weak Ipoh plant which only ran at c.55%. UNISEM believes the worst is over and expects a very gradual recovery in FY23. The group has completed Phase 3 of its Chengdu plant and will begin qualification of customers. We keep our forecasts but raise our TP by 13% to RM3.10 (from RM2.75) and maintain our MARKET PERFORM call.

Within expectations. FY22 core net profit of RM243.4m (+22.8% YoY) met both our forecast and consensus estimates.

YoY, FY22 revenue climbed 13.6% while core net profit grew at a quicker quantum of 22.8% as a higher ASP helped to absorb the increase in minimum wages as well as higher input costs. Despite going through a challenging operating environment in China, its Chengdu plant was still able to operate at c.70% utilisation, cushioning the low run rate at its Ipoh plant (c.55%). Its Ipoh plant struggled with lower loading volume for its assembly and test operations (which are mainly exposed to the consumer electronics and radio frequency chips) due to softer die support as that segment of customers are still undergoing inventory correction.

Very early signs of bottoming. Despite China’s reopening, cautious sentiment among players still lingers. UNISEM believes that it has seen the worst and expects a very gradual recovery in FY23. The group has completed Phase 3 of its Chengdu and will begin qualification of customers. Meanwhile, its new plant in Gopeng is expected to be completed by September 2023 where it can carry out inspection process for eager customers that have been keeping a close eye on the expansion process.

Investment thesis. We like UNISEM for: (i) its healthy exposure in the power module business, (ii) it being able to command pricing and retain customer stickiness given its quality packaging services, and (iii) a strong balance sheet to support its expansion plans. However, there is still looming uncertainty in the immediate term which has resulted in cautious order replenishment among customers.

Forecasts. Maintained FY23F numbers and introduce FY24F numbers.

Maintain MARKET PERFORM but with a higher TP of RM3.10 (previously RM2.75) on higher FY23F PER of 20x (previously 18x), bringing our valuation back on par with peer’s forward average to account for the group’s resilient earnings despite the challenging macro condition. There is no adjustment to TP based on ESG given a 3-star ESG rating as appraised by us (see Page 4).

Risks to our call include: (i) weaker-than-expected USD/MYR, (ii) further delay in new capacity ramp up, and (iii) worsening US-Sino relations.

Source: Kenanga Research - 24 Feb 2023