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Keep BUY, new MYR3.75 TP from MYR4.62, 28% upside with c.2.7% FY22F yield. Following the first federal funds rate (FFR) hike and upward revision to our in-house FFR forecast, we bake in the aggressive rate hike expectation and high bond yield into our valuation parameters by lowering the target P/E to 26x from 32x previously. The current valuation of below 20x FY22 P/E presents a compelling entry level given Unisem (M)’s strong earnings visibility in the upcoming quarters, which is tracking the overall robust demand and favourable factors in the semiconductor sector.
The start of rate hike cycle. With the US Federal Reserve’s hawkish tone alluding to another six rate hikes after the 25bps hike last week, the dust has settled and market is seemingly pricing in the aggressive expectations. Nonetheless, with the aggressive rate hike expectations baked in, any fewer rate hikes than what is expected will be a positive to the market, in our view, should the high inflation scenario be contained. Our in-house economists are ruling out a stagflation event risk and foresee the current US Treasury and Malaysian Government Securities 10-year yields to peak around 2- 2.2% and 3.65-3.75%, which are still relatively lower than 2018-2019’s levels.
Lowering our target P/E valuation. Following the first FFR hike and upward revision of our in-house FFR forecast to 1.75-2% from 1% by end 2022 – and to 2.25-2.50% from 1.5% by end 2023 – we take the opportunity to build in the new expectations and cut our FY22 target P/E to 26x (+0.5SD from the 5-year mean) from 32x (+2SD from the 5-year mean). Consequently, our TP is now being reduced to MYR3.75 after imputing a 2% ESG discount based on our in-house proprietary ESG methodology.
Keep BUY. We expect resilient demand for OSATs amid chip shortages and production bottlenecks boon following robust shipment growth of 14% YoY for silicon wafers in 4Q21. Unisem’s current share price weakness represents a good buying opportunity, as we believe the group will continue to book strong earnings in the upcoming quarters – tracking the overall robust demand and favourable factors in the semiconductor sector. Medium-term growth can be expected once the major plant expansions in China and Ipoh begin contributing significantly to group numbers from FY23-24 onwards.
Downside risks to our call are slower-than-expected orders and stronger- than-expected MYR vs the USD.
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....