• Downgrade to NEUTRAL from BUY, lower MYR2.86 TP from MYR3.80, 2% downside, c.2% FY23F yield. Unisem’s 1Q23 results were a miss, dragged by lower-than-expected topline and margin pressure stemming from weak market conditions and higher payroll expenses. A first interim dividend of 2 sen/share was declared. While the performance should improve QoQ with better utilisation rates and economies of scale, we believe the loadings are unlikely to return to FY22 levels anytime soon – capping the upside in the short-term.

• Dragged by margin squeeze. 1Q23 revenue of MYR354.0m (-22.0% QoQ, -16.6% YoY) and core earnings of MYR11.6m (-82.9% QoQ, -77.5% YoY) were below our and Street expectations, at only 4.5% and 4.9% of full-year forecasts. While 1Q is seasonally weak, the lower-than-expected margin was the main culprit this time, on the back of lower utilisation rates. Lower sales volumes and higher electricity costs plummeted the EBITDA margin to a 3- year low of 19.5% from 25.8% in 1Q22 and 28.9% in 4Q22. The headcount was reduced by 284 to 5,821, commensurate with the drop in utilisation rate.

• Eyeing a better QoQ performance. Despite overall weakness in the semiconductor space, management remains cautiously optimistic on better quarters ahead, backed by solid loading forecasts from majority of its customers. However, we believe the loadings will not recover to FY22 levels anytime soon, and hence, margins may remain under pressure, given the heightened electricity and staff costs.

• Expansion plans. Management noted that its major customer involved in the application of EV is in the midst of relocating its supply chain to Malaysia – this should significantly boost its utilisation in 3Q and 4Q. The Chengdu plant’s utilisation was at c.70% as compared to the Ipoh plant’s 50-55% in 1Q as the assembly and test operations were significantly affected by soft demand. The Chengdu expansion should start to contribute to the bottomline in FY23, and the Gopeng facility should contribute from 1Q24. Total capex incurred in 1Q23 was MYR87.9m (4Q22: MYR101.7m) for the construction of its Gopeng Plant and Phase 3 building in Chengdu.

• Forecasts and ratings. Following the weak set of results, we cut FY23F- 25F earnings by 27%, 9%, and 8% after factoring in lower loadings and margin assumptions. Our TP is revised to MYR2.86 based on unchanged 24x FY23F P/E (at the 5-year mean), and includes a 2% ESG discount, based on our proprietary ESG methodology. While we believe the numbers are set to improve with better utilisation moving forward, we are unsure of the pace of recovery into 2H23 – it may not reach optimal utilisation rates due to its expansion plans.

• Downside (upside) risks to our call are slower (higher)-than-expected orders, and stronger (weaker)-than-expected MYR vs USD.

Source: RHB Research - 28 Apr 2023