• U/G to BUY from Neutral, new MYR3.67 TP from MYR2.98 (13% upside), c.3% yield. FY23 core earnings met expectations with a 67.5% YoY decline to MYR80.5m amid the semiconductor industry’s downturn. Management is cautiously optimistic on FY24 growth, backed by new programmes, customer supply chain diversification, and higher loadings, while citing uneven recovery from various customers. We believe the worst is over, and see a positive earnings trajectory ahead from an overall sector recovery and expansion-led growth – although a meaningful uptick may only be seen in 2H24.

• Within expectations. Unisem (M)’s FY23 revenue of MYR1439.7m (-19.2% YoY) and core earnings were at only 98.0% and 102.7% of our and Street’s full- year estimates. Overall, revenue was dragged by lower loadings from most customers amid the semiconductor industry’s downturn, which dragged EBITDA margin to 22.3% (FY22: 27.7%). A fourth interim dividend of 2 sen/share was declared.

• A better 4Q. 4Q23 revenue of MYR350.8m was lower by 1.5% QoQ and 22.7% YoY as overall loadings were dragged by the downcycle of the semiconductor sector. However, core profit grew by 19% QoQ to MYR26.4m on a better product mix, higher income from scrap sales, and favourable FX. The headcount rose to 5,784 from 5,675 after three consecutive quarters of reduction, indicating better utilisation moving forward. Total capex incurred in 4Q23 was MYR82m (2Q23: MYR77m).

• Optimism for FY24. Management guided for flattish QoQ revenue but sees potential upside risks if sentiment in the semiconductor industry improves, and concerns on macroeconomic conditions and geopolitical tensions recede. A much better FY24 is on the cards, supported by various new programmes and the ramp-up of customers’ strategies to diversify out of China. Management expects an uneven recovery in loadings with certain customers sharing more positive forecasts, while others remain cautious, with a sector- wide recovery expected only in 2H24.

• New Chengdu Phase 3 and Gopeng plants are on track to capture the next semiconductor upcycle. Equipment is expected to come in batches from now, in accordance with the loadings, as management is treading cautiously with the additional capex on machinery – to manage risks – in its bid to fill up the new massive space (2x) available.

• Forecasts and TP. We raise FY24F by 6.4% on better margin assumption and raise our target P/E to 30x (+1.5SD above the 5-year mean) from 27x previously, resulting in our higher MYR3.67 TP (includes a 2% ESG premium). Note that we revised Unisem’s ESG score to 3.1 from 2.9, mainly under the Governance pillar, on meeting the minimum requirement for board diversity and improved guidance and disclosures.

Source: RHB Research - 28 Feb 2024