UNISEM's 9MFY23 results disappointed on weak order replenishment at its plant in Ipoh. Having failed to deliver its earnings guidance for two consecutive quarters, it is now guiding for a flattish revenue QoQ in 4QFY23. We cut our FY23−24F earnings forecasts by 37% and 25% respectively, lower our TP by 25% to RM2.00 (from RM2.65) and maintain our UNDERPERFORM call.

Below expectations. UNISEM’s 9MFY23 core net profit of RM52.8m (- 70% YoY) came in below expectations, accounting for only 43% and 53% of our full-year forecast and the full-year consensus estimate respectively. The variance against our forecast came largely from underwhelming order replenishment, which led to weak cost absorption and hence lower margins.

Results highlights. YoY, UNISEM’s 9MFY23 revenue fell 18% (or 21% in USD terms) as its 3QFY23 revenue in USD terms dipped 5.9% QoQ against the group’s guidance of a flattish performance previously. The group expressed its surprise by the shortfall against its guidance and attributed this weakness to the reluctance of most of its customers to commit to orders despite verbal forecasts. This is particularly true for its Ipoh plant (previously running at c.50% in 2QFY23) which further deteriorated in terms of utilisation rate for both the test and assembly and the wafer bumping operations. Meanwhile, its Chengdu plant continued to be the main contributor to the group with its plant utilisation rate at c.70%. As a result, 9MFY23 net profit dived 72% YoY.

Recovery remains elusive. After failing to deliver its earnings guidance for two consecutive quarters, it is now guiding for a flattish revenue QoQ in 4QFY23. UNISEM attributed this cautious outlook to the absence of a significant uptick in demand for smartphone-related chips, largely tied to China-branded smartphones. Despite a consistent trend of decreasing inventory in Chinese smartphones over several quarters, customers remained conservative, continuing to reduce stockpiles. Meanwhile, the loading volume for automotive and data centre-related chip packages remained stable although customers had no urgency to increase orders in the near term. That said, Unisem maintained its forward-looking approach to meet future demand with the finalisation of Phase 3 plant in Chengdu (doubling capacity of Phase 1 and 2 combined) and its new facility in Gopeng that is due to be completed by end-2023.

Forecasts. We lower our FY23F−24F net profit forecasts by 37% and 25%, respectively.

Correspondingly, we cut our TP by 25% to RM2.00 (from RM2.65) based on an unchanged 20x FY24F PER, representing a c.15% discount to the average forward PER of its peers. There is no adjustment to TP based on ESG given a 3-star ESG rating as appraised by us (see Page 4).

We remain cautious on UNISEM as its earnings visibility will remain weak in the absence of a significant pickup in orders amidst an inventory adjustment cycle in the semiconductor supply chain. Over a longer investment time horizon, we acknowledge: (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. For now, we maintain our UNDERPERFORM call.

Risks to our call include: (i) a stronger-than-expected recovery in global consumer electronics demand; (ii) easing in the USSino chip and trade wars; and (iii) a steep appreciation of the USD against the MYR.

Source: Kenanga Research - 27 Oct 2023