KEY INVESTMENT HIGHLIGHTS

• 3Q20 normalised earnings surged by +63.8%qoq to RM55.5m due to stronger recovery in demand

• 9Q20 normalised earnings grew six folds to RM922.9m which exceeded ours and consensus expectations

• Future demand remains upbeat in the foreseeable years, mainly driven by the proliferation of 5G and IoT

• Annual capital spending to remain elevated to cater for the rise in demand

• Upgrade to BUY with a revised TP of RM5.86

Strong earnings recovery. Unisem (M) Bhd’s 3Q20 normalised earnings surged to RM55.5m from a loss of -RM7.4m as at 3Q19. This was mainly premised on higher revenue of RM357.7m (+23.4%yoy) as well as the cessation of its Batam operation. Due to the higher utilisation rate, 3Q20 profit margin has also improved to 15.5%. On a quarter over-quarter basis, the quarterly earnings also showed an improvement of +63.8%qoq which reinforce the group’s outlook that the worst is over.

Exceed expectations. The continuous strong recovery seen in 3QFY20 earnings had led to significant 9MFY20 normalised earnings growth of almost six fold to RM82.5m. This was premised on +10.6%yoy increase in 9M20 revenue to RM922.9m as well as the cessation of the loss making Batam operation. Unisem’s 9M20 financial performance has exceeded ours and consensus expectations by a variance of more than ten percent.

Capital Spending. 3QFY20 capex came in at RM49.9m, an increase of +46.8m. This was mainly to cater for capacity expansion for assembly and test in Chengdu and Ipoh. This led to higher 9M20 capex of RM216.4m (+9.6%yoy). Given the upbeat outlook ahead, we expect capital spending to remain elevated to support the group expansion as well as new customer acquisition plan.

Impact. We are revising upwards FY20-22 earnings estimates to RM135.4-204.7m. This is due to higher revenue assumption from across the entire market segments with the exception of the automotive segment, which in-turn led to healthier profit margin.

Target price. Post our earnings adjustment, we are revising Unisem’s target price to RM5.86 (previously RM3.10). This is premised on pegging revised FY21 EPS of 25.8sen against forward PER of 22.7x which represents 1.5std deviation premium to the company’s two-year average rolling PER of 18.7x.

Upgrade to BUY. The group has made a strong comeback this year as seen in its 9M20 financial performance. This includes the divestment of the loss-making Batam operation. Given the revamp in the group’s operation as well as business direction, we view that the group is in a much stronger position to fully tap into the proliferation of 5G and IoT. This will be further boosted via its strategic relationship with TSHT. Nevertheless, the group will also continue its efforts to further expand its customer base. Due to the group’s stronger cash generative capability, we view that the group is in a better position to increase its dividend payout while at the same time maintaining its capex commitment. Premised on this, we expect the dividend yield to be above two percent from 2021 onwards. All factors considered, we are upgrading our call recommendation for UNISEM to BUY from NEUTRAL previously.

Source: MIDF Research - 26 Oct 2020