• Keep our contrarian BUY, new MYR4.40 TP from MYR3.67 (14% upside), c.2% yield. We believe Unisem will be among the major beneficiaries of the new semiconductor upcycle, which is expected to continue into 2H24 and beyond. Anticipated improvements in utilisation rates, the recovery in China, new programmes, and customer supply chain diversification are among UNI’s earnings growth drivers, while its expansion strategy should help fuel future growth. We believe the worst is over, and the domestic sector should catch up to the uptrending global semiconductor sector, and experience a re-rating.

• FY23 earnings recap. FY23 revenue of MYR1.44m and core earnings of MYR80m (-67.5% YoY) met expectations, dragged by slower volume loadings from customers amid the semiconductor industry’s downturn. These, coupled with higher input costs, dragged its EBITDA margin to 22.3% (FY22: 27.7%) despite favourable FX movements YoY.

• Positive earnings trajectory. The increase in demand for semiconductors, as indicated by global semiconductor sales data from WSTS and SIA, suggests the beginning of a new semiconductor cycle. While short-term recovery may differ across different segments, the recovery in China’s semiconductor space, growing demand for power management-related integrated circuits (ICs), and an expected recovery in the smartphone market in 2024 are among the positives. Optimism and a ramp-up in activities in the front-end semiconductor space should trickle down and boost the back-end space with a lagged effect. We predict a substantial earnings uptick in 2H24 and further growth into FY25 as UNI’s new Gopeng plant starts to fuel growth.

• Optimism for FY24. Management guided relatively stable QoQ revenue despite entering the seasonally weak 1Q, but anticipates increased revenue if sentiment in the sector improves, and concerns on macroeconomic conditions and geopolitical tensions diminish. FY24 shows promise, bolstered by numerous new initiatives and the implementation of customers' plans to broaden their manufacturing footprints beyond China. The new Chengdu Phase 3 and Gopeng plants (2x capacity) are on track to capture the new semiconductor upcycle. Equipment is expected to come in batches from now, in accordance with the planned loadings by customers.

• Forecasts and TP. We revise our FY25F-26F earnings by 14.2%-14.0% on slower revenue growth assumptions and conservatism, with an expectation of uneven growth across various segments. However, we roll forward our valuation base year to FY25F, resulting in our higher MYR4.40 TP, based on an unchanged 30x P/E, at +1.5SD from its 5-year mean. Our TP is inclusive of a 2% ESG premium, as UNI’s 3.1 ESG score is above the country median.

• Downside risks to our call are slower-than-expected orders, technology obsolescence, and unfavourable FX movement.

Source: RHB Research - 1 Apr 2024