• Maintain BUY and MYR4.40 TP, 20% upside and c.2% yield. 1Q24 revenue and core earnings (+7.2% YoY) bucked the trends of four consecutive contractions, but were slightly behind our expectation given the lower-than- expected margins from wage hike and absence of scrap sales. Management is optimistic on sequential growth into 2Q and further into 2H24, backed by new programmes, customer supply chain diversification, and higher loadings from the Chengdu plant. The strong guidance, positive earnings trajectory, and an expected sector recovery underpins our call.

• Slightly behind our expectation. Unisem (M)’s 1Q24 revenue of MYR364.8m (+3% YoY) and core earnings of MYR12.5m were at 7.5% and 6.5% of our and Street’s full-year estimates. We deem the results as below our expectation but within consensus, given the expectation of much stronger quarters ahead on better loadings. A first interim dividend of 2 sen/share was declared.

• Encouraging recovery. The recovery in revenue QoQ and YoY were encouraging despite being a seasonally weak 1H for the semiconductor sector. This was on various new programmes and customers, and a recovery in China’s consumer electronics market. EBITDA margin was flattish YoY at 19.1% (1Q23: 19.8%), but dipped from 24.6% in 4Q23, mainly due to the lower scrap sales and higher wages. The headcount rose for two consecutive quarters to 6,067 from 5,784 to prepare a ramp-up, indicating better utilisation moving forward. Total capex incurred in 4Q23 was MYR84.4m, mainly for the construction of the Gopeng plant (4Q23: MYR82.3m).

• FY24 optimism. Management guided for 10-12% QoQ revenue growth, but sees potential upside risks if the Ipoh plant’s utilisation improves. Despite this plant’s prolonged weakening on uneven recoveries from various clients, the Chengdu plant’s utilisation is set to reach optimal levels – given strong recovery in demand for consumer electronics, power management integrated circuits or PMIC, and ramp-up of certain smartphone brands.

• Installation of equipment and qualification at the Chengdu plant’s Phase 3 is taking place while the Gopeng facilities are on track to achieve Certificate of Practical completion on 30 Apr (with internal qualification possibly starting in May). This paves the way to capture the next semiconductor upcycle in 2H24 and beyond. Capex spending on machinery will be weighted carefully based on loadings and commitment from clients in Unisem’s bid to take on new businesses to fill up the new massive space (2x) available. Certain clients diversifying out from China remain very cost-conscious in managing their loadings to Unisem, given the competitive pricing strategy in China.

• Forecasts and TP. We lower our FY24F earnings by 10.9% on slower revenue growth and margins assumptions. However, we maintain our MYR4.40 TP based on an unchanged 30x FY25F P/E at +1.5SD from its 5-year mean and on par with the KLTEC. Our TP is inclusive of a 2% ESG premium, as Unisem’s 3.1 ESG score is above the 3.0 country median.

Source: RHB Research - 29 Apr 2024