Review

• Unisem’s 1HFY23 core net profit of RM33.9mn (-72.1% YoY) came below ours and consensus full-year estimates at 21.9% and 19.5%, respectively. On our end, the disappointment was due to weaker-than-expected revenue. While 2QFY23’s USD revenue recovered 3.9% QoQ, it fell short of the group’s guidance of +10% to +12% QoQ. Amid the semiconductor industry’s still weak sentiment, management now foresees flattish QoQ performance in the coming quarters instead of earlier optimism for a strong recovery in 2HFY23.

• Unisem declared a 2nd interim dividend of 2.0sen/share. This brought 1HFY23’s total dividends to 4.0sen/share (1HFY22: 2.0sen/share). Supported by the group’s positive operating cash flow and robust balance sheet (3QFY23: net cash of RM289.2mn or 17.9sen/share), management indicated its intention to declare quarterly dividends of a similar quantum. Our latest FY23F/FY24F/FY25F DPS of 8.0sen/8.0sen/8.0sen (previously 4.0sen/5.0sen/5.0sen) implies a payout ratio of 151%/68%/56% and forward yield of 2.5%/2.5%/2.5%.

• 1HFY23’s core net profit sank 72.1% YoY to RM33.9mn as revenue declined 17.5% YoY to RM732.7mn (USD revenue -21.0% YoY to USD164.2mn) on lower sales volume. Utilisation rates across the group’s facilities in Chengdu and Ipoh were affected by broad-based weakness across market segments as the semiconductor industry continued to face inventory correction and demand softening for electronics. The lower economies of scale coupled with higher depreciation and amortisation led core net profit margin to narrow 9.1pp YoY to 4.6% (versus FY20 to FY22’s of 11.1% to 13.7%).

• During 2QFY23, Unisem reported revenue and core net profit of RM378.7mn (+7.0% QoQ, -18.4% YoY) and RM24.0mn (+142.7% QoQ, - 65.9% YoY). USD revenue stood at USD83.7mn (+3.9% QoQ, -21.6% YoY). The sequential top and bottom-line recovery were attributed to higher sales volume and the strengthening of the USD versus the Ringgit.

• As a % of total revenue, 2QFY23’s contributions by market segment were led by consumers (34%, +1pp YoY). This was followed by communications (19%, -4pp YoY), industrial (18%, unchanged YoY), automotive (17%, +3pp YoY), and PC (12%, unchanged YoY).

Outlook & Conference Call Key Takeaways

• Amid the semiconductor industry’s still weak sentiment, management dialled down its tone on the group’s near-term outlook. As opposed to earlier optimism for a stronger recovery in 2HFY23, management foresees flattish QoQ performance in the coming quarters. For 3QFY23, USD revenue was guided to be flat QoQ.

• Notwithstanding the weak near-term outlook, management remains optimistic about i) the semiconductor industry’s eventual upcycle, which is anticipated to be fuelled by secular trends (e.g., 5G, artificial intelligence, high-performance computing, the Internet of Things, and vehicle electrification), and ii) opportunities from customers adopting a China Plus One strategy. In this regard, management reaffirmed Unisem’s large-scale expansion plans in Chengdu and Ipoh. In Chengdu, the Phase 3 Building is undergoing the installation of equipment and qualification. In Ipoh, the construction of the Gopeng plant, which will double Unisem’s production capacity in Malaysia, is expected to be completed in 4QFY23.

Impact

• We have revised our FY23F/FY24F/FY25F earnings estimates by -44.8%/- 0.7%/-2.2% mainly after: i) lowering FY23F sales by 5.4% to reflect actual 2QFY23 results and ii) revising DPS in the corresponding period to 8.0sen/8.0sen/8.0sen (previously 4.0sen/5.0sen/5.0sen).

Valuation & Recommendation

• In all, we maintain our TP for Unisem at RM2.60 based on a PE multiple of 22.0x CY24F EPS which -0.3SD below the stock’s 5-year mean of 25.4x. At current levels, the stock trades 27.3x against CY24F EPS. In view of the unfavourable risk-reward potential, we reiterate our Sell recommendation on Unisem. We remain cautious about Unisem’s near-term outlook amid the continued softness from the consumer, communications, and PC market segments (which from, FY18 to FY22, collectively accounted for 65% to 71% of Unisem’s revenue).

• Key risks include: i) heightened geopolitical tensions weighing on economic growth and disrupting supply chains, ii) weaker-than-expected sales, and iii) a weakening of the USD against the Ringgit.

Source: TA Research - 28 Jul 2023