Despite QoQ profit growth, UNISEM's 9MFY24 results came in below expectations, weighed by lower margins from an unfavourable product mix and higher operational costs. Looking ahead, the group expects flat sequential revenue growth but remains optimistic about a sector-wide recovery in CY25. We have revised our FY24 and FY25 earnings forecasts down by 44% and 13%, respectively, resulting in a lower TP by 13% to RM3.23. We already have accorded UNISEM the benefit of +1SD valuation based on the peers' historical average forward PER, at an unchanged 29x, but the limited TP upside based on our revised FY25 earnings maps to a MARKET PERFORM, lowered from OUTPERFORM.

UNISEM's 9MFY24 core net profit of RM52m (-1.5% YoY) came in below expectations, accounting for just 32% of our full-year forecast and 41% of the consensus estimate. The weaker performance was primarily due to lower margins from an unfavourable product mix and higher operating costs.

YoY, its 9MFY24 revenue improved 7.4% higher (or 5.2% in USD terms), driven by higher contribution of its Auto and Communication segments. The automotive segment benefitted from robust loading volumes from a key customer, contributing approximately 40% to Chengdu's revenue and about 20% to the group's overall turnover.

Meanwhile, the Communication segment saw higher contributions from its MEMS microphone-related business. However, its GP margin contracted to 7.3%, compared to 9.4% a year ago, impacted by product mix shifts and increased operating expenses linked to workforce expansion (6.4k employees vs 5.6k a year ago) weighed on profitability.

Notably, it recorded RM10.5m forex gain in 9MFY24 vs. a loss of RM1.1m a year ago. Despite this, net profit still edged down 1.5% YoY to RM52m.

QoQ, its 3QFY24 top line grew by 4% (or 9% in USD term to USD92m) while net profit jumped nearly 60% to RM27m, supported by positive operating leverage and favourable forex movements. The group posted a higher realised forex gain of RM12m, up from RM2.5m in 2QFY24. In addition, utilisation rates improved, with the Chengdu plant exceeding 80% and the Ipoh plant operating at 50%-55%, vs 75% and 45%-50% in 2QFY24.

Outlook. The group anticipates flat sequential revenue growth in USD terms. It also anticipates that its key automotive customer at the Chengdu plant may begin shifting additional volumes to the Ipoh plant, which could further enhance utilisation rates. UNISEM indicated that the recent minimum wage hike will have minimal impact in the near term, with all staff already earning above the threshold, with no plans to expand the workforce. The group aims to mitigate costs by enhancing utilisation and production efficiency. Looking ahead, the group is optimistic about strong growth in CY25, driven by a recovery in the smartphone market, accelerated EV adoption, and rising demand for data centres and cloud services, fuelled by AI and digital transformation.

Forecasts. While we expect 4QFY24 to be sequentially stronger, we cut FY24 and FY25 earnings forecasts by 44% and 13%, respectively, following the soft 9MFY24. This reflects toned down margin assumptions amid the uneven recovery across segments.

Valuations. We lowered our TP to RM3.23 (from RM3.70 previously) based on an unchanged PER of 29x pegged to FY25F EPS, which is about +1SD against the industry peers' historical average forward PER. There is no adjustment to TP based on ESG given a 3-star ESG rating as appraised by us (see Page 4).

Investment case. We like UNISEM for: (i) its healthy presence in the power module business, (ii) being able to benefit from the China+1 initiative, and (iii) a strong balance sheet to support its expansion plans. However, its fundamentals have been largely priced in the current share price.

Risks to our call include: (i) a weaker-than-expected recovery in global consumer electronics demand; (ii) intensifying US- Sino chip wars, and (iii) a steep depreciation of the USD against the MYR.

Source: Kenanga Research - 30 Oct 2024