Unisem’s  recent  share price  appreciation was  fuelled by   an  improving near-term  outlook,  as  industry  associations/experts  turn  more  bullish on  the  sector.  This  could  entice  investors,  as  the  group  is  poised  to return to the black in 2QFY14  after  five consecutive quarters  of losses. With  that,  we  upgrade  our  FV  to  MYR1.56  (from  MYR1.22).  Given  the limited upside, we are maintaining our NEUTRAL call.

• Positive outlook. Global sales of semiconductors surged 11.5% y-o-y in April,  according to data from the  Semiconductor Industry Association.  At the same time, World Semiconductor Trade Statistics has also upgradedits  2014  sales  growth  forecast  to  6.5%  from  4.1%,  while  Cowan  LRA raised its estimate to 9.0% from 8.4%. The increasingly bullish sentiment among  these  industry  experts,  in  our  view,  implies  better  earnings visibility for semiconductor players come 2HCY14. With that in mind, we believe Unisem could likely return to the black in 2QFY14, after incurring losses for the past five consecutive quarters.
• Major shareholder  increases  stake.  Unisem’s  major shareholder cum MD Mr John Chia has been increasing his stake in the company over the past two months, and purchased some 16.6m shares in the open marketto increase his interest  in Unisem to 26.3% currently. This indicates that management has confidence in the company’s  improving  fundamentals and would support its share price over the near term.
• 2QFY14 outlook. Management guided for 2QFY14 revenue growth of 8-10%  q-o-q,  driven by higher  overall  utilisation rates which clocked in at sub-65% in 1QFY14. We believe its near-term focus would be to  expand its  presence  within  the  communication  and  auto  segments,  which currently make up 29% and 17% of sales respectively.
• Maintain NEUTRAL.  In  view  of the more positive  industry outlook, we upgrade  our  FV  to  MYR1.56  (from  MYR1.22),  pegged  to  a  revised CY14F P/NTA of 1.2x (from 0.9x). This implies about a 15% premium to its 5-year average P/NTA of 1.0x, but  its valuation is  still at about a 20% discount  to  the  5-year  sector  average  of  1.4x.  We  deem  this  justified, given  Unisem’s relatively more volatile earnings track record and higher gearing. Given the limited upside, we are maintaining our NEUTRAL call.

Source: RHB