• BUY, new MYR4.18 TP from MYR3.75, 52% upside, c.3% FY23F yield. Unisem recorded its historic best 2Q core earnings of MYR70.6m (+23.9% YoY), which met expectations on sustaining topline growth, better operating leverage, and favourable FX movements. For 2H, we remain upbeat on its earnings visibility and growth momentum on strong underlying demand for majority of its products, and higher ASPs. It declared a first interim dividend of 2 sen per share.

• Meets expectations. 1H22 revenue of MYR888.5m (+14.5%) and core earnings of MYR122.4m (+19.6%) were within our and Street’s full-year estimates, at 51.5% and 51.3%. The better performance was driven by higher sales volumes and ASPs, coupled with favourable FX, while its EBITDA margin was stable at c.27.5%. Its China unit contributed c.55% of revenue and 55-60% of group earnings.

• Best quarter thus far: 2Q22 revenue of MYR464.1m (+9.3% QoQ, +15.4% YoY) and core earnings of MYR70.6m (+36.5% QoQ, +23.9% YoY). As for 1H22, the performance in 2Q22 was derived from higher demand from its customers, better ASP, and favourable FX. Total capex incurred in 2Q22 was MYR146.3m (1Q22: MYR182.2m), mainly for equipment and construction of the Chengdu Phase 3 building, while headcount was stable at 6,152.

• Strong visibility still. Management acknowledges there were several temporary slowdowns in certain segments, such as in consumer electronics – yet it remains bullish on the overall demand for OSATs in the coming quarters. Some clients still experienced wafer shortages especially those in the automotive segment, impacting the utilisation of the Unisem Advanced Technologies (UAT) bumping facility, as the sector’s overall supply of chips remains tight. Strong customer loadings and ASP increases for all products at its Ipoh plant should help cushion the hike in its utility costs and minimum wage. Management also increased headcount by 200, and expects to ramp up some of the orders that were not fulfilled due to labour shortages.

• Expansion plans on track: Phase 3A expansion in Chengdu (30-40% of the existing plant) is progressing well and should be ready by end of the year, followed by an accelerated expansion plan in the Gopeng facility, which should be ready by 1H23.

• Forecasts and ratings. We tweak FY22F earnings by +5.4% to reflect the higher USD/MYR assumption and expect a sustained growth outlook in 2H22 amid strong demand for OSATs. Medium-term growth is intact, from contributions of major plant expansions in China and Gopeng from FY23-24 onwards. Our TP is now MYR4.18, as we roll forward our valuation base year to FY23, and place a target P/E of 25x (in line with KLTEC’s 5-year mean), after imputing a 2% ESG discount based on our proprietary methodology. Downside risks: Slower-than-expected orders, and stronger-than-expected MYR vs USD.

Source: RHB Research - 29 Jul 2022