KEY INVESTMENT HIGHLIGHTS

• The group suffered 1Q20 normalised loss of -RM5.7m, mainly due to the movement control order (MCO)

• FY20 capex may come in lower due to repurpose of the Batam plant subsequent to the cessation of the operation

• Lowering FY20 and FY21 earnings estimates to factor in the impact of Covid19 pandemic

• While FY20 is expected to be a challenging year, we view that the seasonal uptrend in quarterly earnings to persist

• Maintain NEUTRAL with a revised TP of RM1.90

An event-battered quarter. Unisem (M) Bhd’s 1Q20 normalised loss came in at –RM5.7m after excluding the gain on foreign exchange. The lower earnings mainly stemmed from lower revenue of RM273.3m (- 9.8%yoy). The weaker revenue was led by the adverse impact on MCO as well as lower sales volume from its Batam operation in view of the planned cessation of operation on 31st March 2020. In addition, the group also incurred higher net finance cost and higher effective tax rate. All in, Unisem’s loss-making 1Q20 quarter came in below ours and consensus expectations.

Capital Spending. Unisem’s 1QFY20 capital expenditure (capex) increased by +17.9%yoy to RM84.8m. This was mainly channeled to its Chengdu plant to increase the production capability and capacity. Nonetheless, management guided that full year FY20 capex could come in lower as compared to FY19 as the management remains cautious on the outlook for 2H20 in view of the on-going Covid19 pandemic. In addition, the group will also seek to repurpose of some of the assets in Batam for its existing production in Ipoh and Chengdu.

Impact. We are lowering our revenue assumption across all the products segments to FY20 and FY21 to take into account the impact of the Covid19 pandemic. As a result, FY20 and FY21 earnings estimates have been reduce to RM51.5m and RM67.1m respectively.

Target price. We are rolling forward our valuation based year to FY21. Coupled with our earnings adjustments, we derive a new target price of RM1.90 (previously RM2.09). This is premised on pegging FY21 EPS of 9.1sen against unchanged forward PER of 20.9x. Our target PER is the group’s two year historical average PER.

Maintain NEUTRAL. The group’s 1Q20 financial performance has adversely impacted by the Covid19 outbreak which led to disruption in production activities at both the Ipoh and Chengdu plants. Subsequent to the disruption, the production activities have pick up pace. This is expected to continue in the coming quarters. Higher production activities would also enable the group make up for the order backlog. In addition, the ramp in production activities will be supported by the demand of 5G infrastructures and portables. However, as the pandemic has yet to subside, we do not discount there could be further interruption in value chain.

We also expect the ongoing pandemic will also affect the demand of the end users. On another note, we view that the timely cessation of the Batam operation would also help to preserve the group’s cash balance and prevent further dilution to the group earnings. At this juncture, we view that the downside risk to earnings is rather limited. All factors considered, we are maintaining our NEUTRAL recommendation.

Source: MIDF Research - 30 Apr 2020