Unisem (M) - Revenue Decline Bottoms Out

Date: 
2024-02-28
Firm: 
KENANGA
Stock: 
Price Target: 
2.95
Price Call: 
HOLD
Last Price: 
3.48
Upside/Downside: 
-0.53 (15.23%)

UNISEM's FY23 results met expectations. Its 4QFY23 core net profit jumped 50% QoQ due to a favourable sales mix and positive forex movements. It guided for a stable sequential outlook, despite the seasonally lull 1QFY24. We tweak our FY24F earnings forecast up by 1% but raise our TP by 48% to RM2.95 (from RM2.00) and upgrade our call to MARKET PERFORM from UNDERPERFORM.

UNISEM’s FY23 core net profit of RM81.2m (-67% YoY) met expectations.

YoY, its FY23 revenue fell 19% (or 22% in USD terms) on lower loading volume from its customers. The decline was largely due to sub- optimal run rates at its Ipoh plant at c.50% for both the test and assembly, and the wafer bumping operations. Its core net profit fell by a steeper 67% due to higher electricity and labour cost. Its Chengdu plant continued to be the earnings driver with a utilisation rate of c.75%.

QoQ, its 4QFY23 core net profit jumped 50% on a flattish top line due to a favourable sales mix and positive forex movements, compared to a forex loss in the prior quarter.

Outlook. Despite the coming 1QFY24 being a seasonal lull period due to the long Chinese New Year break, the group anticipates a stable sequential outlook, indicating the decline in its revenue has bottomed out.

UNISEM is poised to initiate qualification for new products from new IDM customers, particularly in the areas of NAND flash, radio frequency switches, and MEMS microphones for US smartphones. Qualification is set to commence in 1HFY24, with pilot runs scheduled for 2HFY24, in line with the anticipation of more meaningful recovery for the group.

UNISEM is carrying out qualification process for the Phase 3 plant in Chengdu, which is double the capacity of Phase 1 and 2 combined.

Simultaneously, the new facility in Gopeng, Malaysia, is about to be completed, with equipment installation slated to commence in 2QFY24.

Forecasts. We tweak our FY24F net profit forecast up by 1% and introduce FY25F numbers.

Valuations. We raise our TP by 48% to RM2.95 (from RM2.00) based on a higher 29x FY24F PER (from 20x) as we remove the discount to the average forward PER of its peers to reflect its improved outlook.

There is no adjustment to TP based on ESG given a 3-star ESG rating as appraised by us (see Page 4).

Investment case. We like UNISEM for: (i) its healthy presence in the power module business, (ii) it being able to command pricing power and retain customers based on product quality, and (iii) a strong balance sheet to support its expansion plans. Upgrade to MARKET PERFORM from UNDERPERFORM.

Risks to our call include: (i) a weaker-than-expected recovery in global consumer electronics demand; (ii) intensifying US-Sino chip and trade wars; and (iii) a steep depreciation of the USD against the MYR.

Source: Kenanga Research - 28 Feb 2024

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