• Still BUY, new MYR3.72 TP from MYR3.95, 17% upside, c.2% yield. 9M24 core earnings missed, dragged by lower margins from subdued utilisation, unfavourable FX, and higher costs despite elevated USD revenue. Unisem (M) expects flattish QoQ loadings but sees a better FY25 on higher loadings, new programmes, and supply chain diversification. Despite the subdued earnings, a sector recovery is underway with better loadings, albeit a gradual one. We advocate buy on dips and ride on a stronger recovery into FY25.

• Below. 9M24 revenue of MYR1,169.1.4m (+7.4% YoY) led to core earnings of MYR41.5m (-23%) at 42% and 32.5% of our and Street’s full-year estimates. Main drags: Lower gross margins – on product mix changes, higher operating costs, and loss-making wafer bumping services. Notably, EBITDA margins compressed to 18.9% (9M23: 21.5%) despite higher revenue on suboptimal utilisation, increased staff costs, and unfavourable FX movements. A MYR0.02 third interim dividend (flattish YoY) was declared.

• Stronger sequentially. 3Q24 USD revenue (USD92m) continues its upward trajectory (three consecutive quarters) with a 9.1% growth QoQ thanks to better loadings at Unisem Chengdu, which indicates a recovery is underway. Nonetheless, core profit was only higher marginally QoQ to MYR14.7m (+3.3%) at MYR14.7m but -33.7% YoY due to unfavourable FX and increased operating costs stemming from additional expansion costs. Headcount continued to rise, reaching 6,398, but management indicates there is no intention to increase this further. Total 3Q24 capex was MYR91.6m (2Q24: MYR85.5m), mainly for equipment at the Chengdu plant and plant construction at Gopeng. Capex should taper off from hereon.

• Outlook. A flattish QoQ revenue ahead into 4Q can be expected, where demand for the micro-electromechanical systems or MEMS microphones, power management integrated circuits or PMICs, and sensors for industrial and automotive segments remains healthy. New customers/programmes from China/Taiwan Plus One are gaining traction – contribution expected in 1H25. The Chengdu plant is running at healthy utilisation, and installation of equipment and qualification at the Phase 3 plant is ongoing. Things are less rosy in Ipoh, where the operations were sub-optimal. The Gopeng plant is now undergoing qualification, and management is hopeful that this plant can contribute c.USD15-30m revenue in FY25 and help to reduce costs on efficiency gains. Higher labour and FX costs can be partially absorbed with increased utilisation while some will be passed on to customers.

• Forecasts and ESG. Post the earnings miss, we cut FY24F-26F earnings by 35%, 5%, and 3% on margin and cost assumptions. Our TP is now lowered to MYR3.72 based on an unchanged 30x FY25F P/E at +1.5SD from its 5-year mean (on par with KLTEC). Our TP includes a 2% ESG premium. Downside risks: Slower-than-expected orders, technology obsolescence, and unfavourable FX movement.

Source: RHB Securities Research - 30 Oct 2024