Unisem’s 1HFY14 core profit of MYR10.7m trumped expectations on  a faster-than-expected recovery in its overall utilization rate. It recorded a profit in  2QFY14  after closing in the red  for the  past five quarters. We expect  its performance to continue improving in  2HFY14. As such, we upgrade  our  call  to  BUY  (from  Neutral)  with  our  FV  now  revised  to MYR2.16 (from MYR1.56), pegged to a revised P/NTA of 1.4x.

Above expectations.  Unisem’s 1HFY14 revenue of MYR479.6m closed 3.4% lower y-o-y due to lower sales volumes  across the Asia and North America  regions.  EBITDA,  however,  surged  by  31.3%  y-o-y  to MYR102.6m  on  a  better  product  mix,  lower  overhead  costs  and  the cessation  of  its  lossmaking  European unit  in  end-2013.  All  in,  1HFY14 core  earnings  closed  at  MYR10.7m  as  2QFY14’s  normalized  profit  of MYR10.8m marked its return to the black,  after closing in the red  for the past five quarters. We deem the results as above expectations, at 32.0% of  consensus  and  56.7%  of  our  full-year  forecasts  –  as  we  foresee continued improvement in its profitability come 2HFY14. 

Briefing highlights.  Its  2QFY14  utilisation rate averaged at 65% (from 60% in 1QFY14). Management is guiding for 3QFY14 revenue growth of 5-10%  q-o-q,  driven  by  a  further  recovery  in  its  overall  utilisation  rate. This,  in our view, could  be achieved by growing its better-yielding wafer level packaging and bumping business and increasing its focus on  the communication,  consumer  and  auto  segments  (which  make  up  29%, 27% and 18% of its 2QFY14 sales respectively). 

Forecasts and risks.  In view of  its  successful  turnaround  in profitability in  2QFY14  and  management’s  bullish  near-term  outlook,  we  are upgrading our FY14F and FY15F earnings forecasts to MYR65.2m (from MYR18.9m) and MYR92.2m (from MYR61.5m).  This is  premised  on our revision in overall utilization rates as well as more stringent cost controls, as evident in its improving profitability ratios in 1HFY14.  Key risks to our forecasts  are: i)  the strengthening  of  MYR  against  USD,  ii)  higher  raw material costs, and iii) a slowdown in the semiconductor market. 

Upgrade  to  BUY.  We  expect  a  sharp  rebound  in  Unisem’s  2HFY14 performance on improving utilization rates. As such, we upgrade our call to BUY (vs Neutral), with our FV now revised to MYR2.16 as we peg  it to a  revised  P/NTA  of  1.4x  (from  1.2x  previously),  which  is  the  5-year sector average, to our FY15F forecasts.

Source: RHB