Review

• Unisem reported a net loss of RM3.2mn in 3QFY19. However, excluding exceptional items amounting to RM28.9mn, the group remained in the black with a core net profit of RM25.7mn (+77.8% QoQ, -26.9% YoY).

• The exceptional items include: 1) RM22.4mn net expenses on severance and reversal of retirement benefits in PT Unisem, and 2) RM6.5mn of deferred tax expense mainly due to the reversal of retirement benefits in PT Unisem.

• To recap, the group has since 3QFY19 been progressively scaling back PT Unisem, its loss-making operations in Batam Island, Indonesia, ahead of its scheduled shutdown in March 2020. In this regard, management highlighted that further impairments and provisions are expected to be recognised in 4QFY19 and 1QFY20.

• Overall, we deem 9MFY19’s core net profit of RM46.2mn (-36.1% YoY) to be above ours and consensus estimates at 83.4% and 72.0% respectively. The positive surprise was mainly due to higher-thanexpected savings from the scale back of PT Unisem’s operations which drove 3QFY19’s core net profit margin to expand 3.5pp QoQ to 8.1%.

• Among others, the savings came from the rationalisation of manpower with the group’s overall headcount reduced by 527 QoQ to 7,151. Note that with management guiding for ~800-1,000 more headcount to be trimmed, we expect further savings to be realised in the quarters ahead. From Unisem’s 2018 annual report, we gathered that PT Unisem had 1,600 employees.

• That said, the group remained challenged by the trade war – 3QFY19 and 9MFY19’s revenue in USD were respectively down 12.3% YoY and 11.8% YoY to USD76.0mn and USD225.3mn with demand weaker across segments. On a QoQ basis, 3QFY19’s revenue in USD improved marginally 1.0% to USD76.0mn due to a pickup in the smartphone and new microphone business. In view of the lingering trade war, management remained cautious on the group’s near-term outlook with 4QFY19’s revenue in USD guided to be flattish on a QoQ basis.

• Meanwhile, the group remained in healthy financial standing with a robust net cash position of RM111.3mn (-25.8% QoQ, -48.0% YoY). The reduction in net cash position was mainly due to investments for the expansion of its wafer bumping fab and testers and handlers.

• Separately, the group declared a 2nd interim dividend of 2.0sen/share (YTD: 4.0sen/share, -11.1% YoY).

Outlook

• Despite management’s still cautious stance on the group’s near-term outlook, we remain convinced that it will stage a strong earnings recovery in FY20 underpinned by: 1) the shutdown of PT Unisem which will completely remove its long-standing drag on overall earnings, and 2) the ramp up of recently completed facilities for wafer bumping as well as MEMs microphone assembly (rising adoption in consumer and Internet of Things applications).

• Meanwhile, the group announced that it has acquired a 7.59% stake in its 92.41%-owned subsidiary Unisem Advanced Technologies Sdn Bhd from FlipChip International LLC for a cash consideration of RM7.1mn or RM1.12/share which is equivalent to its net tangible asset as at 30 June 2019. The exercise was merely to streamline the corporate structure and is not expected to materially impact the group’s financials.

• As for the matter on the group’s non-compliance with Bursa Malaysia’s public shareholding spread requirement of at least 25%, we note that it is still working on complying with the threshold in the lead up to the deadline on 31 December 2019. Unisem’s public shareholding spread as at 30 September 2019 stood at 15.744%.

Impact

• We have raised our FY19/FY20/FY21 earnings estimates by 27.9%/31.8%/28.5% to RM70.9mn/RM119.1mn/RM134.8mn mainly after lowering our expense assumptions, which implies margin expansion of 1/2/2pp to reflect the higher-than-expected savings from the scale back of PT Unisem’s operations. Alongside this, we have also raised our dividend assumptions for the corresponding period from 4.0/6.0/7.0sen to 6.0/8.0/10.0sen, implying forward yield of 2.3%/3.1%/3.9%.

Valuation

• Following our earnings upgrade and assigning a higher target PE multiple of 17.0x CY20 (previously 15.0x CY20) which is in line to the stock’s 5- year mean, we arrive at a higher TP of RM2.75/share (previously RM1.88/share). We believe that the encouraging results seen thus far from the group’s on-going exercise to offload the burden from PT Unisem would instill further confidence in the market on the group’s ability to stage a strong earnings recovery in FY20. Hence, we upgrade our recommendation on Unisem from Sell to Hold. Key risks include weaker than expected loadings and a weakening of the USD against the ringgit.

Source: TA Research - 29 Oct 2019