• Maintain BUY and MYR4.40 TP (10% upside), c.2% yield. 1H24 core earnings were below expectations, undermined by lower margins from product mix and additional operational costs. Management is cautiously optimistic about 2H24 loadings, backed by higher loadings from automotive customers, new programmes, and supply chain diversification. Despite the earnings miss, we believe a recovery is underway with QoQ improvement and stronger loadings ahead, consistent with the overall sector trajectory. Therefore, we advocate positioning to ride on the new semiconductor cycle on weakness.

• Below expectations. Unisem’s 1H24 revenue of MYR759.4m (+3.6% YoY) translated into core earnings of MYR26.7m, at only 15.5% and 18.4% of our and Street’s full-year estimates. Lower gross margins – due to changes in product mix and higher operating costs from additional hiring for expansions – drove down overall profitability. Notably, EBITDA margin compressed to 18.7% (1H23: 20.5%) despite higher revenue, which was due to favourable FX movement. A second interim dividend of MYR0.02/share was declared.

• Stronger sequentially. 2Q24 revenue grew by 8.2% QoQ and 4.2% YoY (revenue in USD terms rose 8.5% QoQ, 0.8% YoY) to MYR394.6m as overall loadings improved, indicating that a recovery is underway. Consequently, core profit was higher QoQ (+14.1%) at MYR14.2m but lower YoY (-29.4%) due to changes in product mix and increased operating costs stemming from additional expansion costs. Headcount continued to rise, reaching 6,359 from 6,067 to cater to stronger loadings ahead. Total capex incurred in 2Q24 was MYR85.5m (1Q24: MYR84.4m), mainly for the Gopeng plant construction.

• Optimism for 2H24. Management guided for stronger (+8-10%) QoQ revenue and sees potential upside risks from its utilisation in Ipoh, if the recovery gains pace. Various new programmes such as MEMS microphone, PMIC, and sensors for industrial and automotive segments will drive growth in 2H, while smartphone applications have yet to see a meaningful pick-up. In China, the Chengdu plant is running at near-full capacity at c.75%, and the installation of equipment and qualification in the Phase 3 plant are in progress. In Ipoh, Malaysia, the utilisation rate was below par at 45-50%, but this is expected to rise to 55% in 3Q24 with better loadings. However, wafer bumping at the UAT site was at a loss and will continue to be soft.

• Forecasts and ESG. We cut FY24F earnings by 35% (but maintain FY25F- 26F) on slower revenue growth and margin assumptions amid the uneven recovery across segments. 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 includes a 2% ESG premium. Downside risks: Slower- than-expected orders, technology obsolescence, and unfavourable FX movement.

Source: RHB Research - 31 Jul 2024