• Maintain NEUTRAL, higher MYR2.98 TP from MYR2.86, 7.5% downside, c.2.5% FY24F yield. Unisem’s 1H23 results missed, dragged by lower-than- expected topline and margin. A second interim dividend of 2 sen/share was declared. While the performance should be relatively better in 2H23 on seasonality effect, management remains cautious on the overall and customer demand uncertainties in the patchy recovery path for the semiconductor industry. We cut our forecasts accordingly to reflect the prolonged weakness and roll forward our valuation base year to FY24F.

• Dragged by margin squeeze. 1H23 revenue of MYR732.7m (-17.5% YoY) translated into core earnings of MYR32.8m (-73.2% YoY) – which missed expectations – at only 16.8% and 18.9% of our and Street’s full-year estimates. The lower-than-expected margin at 20.7% (1H22: 27.5%) was affected by higher input costs, loss of economies of scale, and slower revenue, amid weaker overall demand for chips.

• Better QoQ. 2Q23 revenue of MYR378.7m and core earnings of MYR21.2m improved by +7% and +81.8% QoQ, thanks to higher sales volume and favourable FX movements. Revenue and core profit continued to slide – 18.4% and -70% YoY – on the back of weaker loadings and loss of economies of scale. 2Q capacity utilisation in the Chengdu and Ipoh plants were at 70%-75% and 50-55% amid softer sector-wide demand. The headcount was further reduced by 75 QoQ to 5,746, to commensurate with the drop in utilisation rate.

• Outlook. Despite a traditional peak season, management is guiding for a flattish QoQ revenue, given the prolonged lacklustre demand from the end- consumer market and elevated inventory level in the supply chain. Hence, we believe recovery will remain patchy in the coming quarters alongside margin pressure caused by elevated utility and staff costs. More meaningful recovery can only be expected in the latter part of FY24, based on the current market sentiment as customers are pushing back all the new programmes to FY24. Unisem’s Chengdu Phase 3 expansion is completed while the Gopeng facility will be ready in 4Q23 and start contributing in FY24. Total capex incurred in 2Q23 was MYR62.9m (1Q23: MYR87.9m) for the constructions of its Gopeng plant and Phase 3 building in Chengdu.

• Forecasts and ratings. Post results review, we cut FY23F-25F earnings by 54.1%, 37.5%, and 18.8% after factoring in lower loadings and margin assumptions. Our TP is raised to MYR2.98 as we roll forward our valuation base year to FY24F and raise our target P/E to +1.5SD above the 5-year mean at 27x to reflect the improved market sentiment and peaking of Fed Fund Rate expectations. A 2% ESG discount is baked into our TP, based on our proprietary ESG methodology. We believe the recovery into 2H23 will be patchy, given the various uncertainties and time needed to achieve optimal utilisation rates, especially with the various expansion plans in place.

• Downside (upside) risks to our call are slower (higher)-than-expected orders, and favourable (unfavourable) FX movement.

Source: RHB Research - 28 Jul 2023