• Keep BUY with new MYR3.93 TP from MYR4.40, 25% upside, c.2% yield. Unisem (M) is expected to be negatively impacted by the unfavourable FX movement, given its USD-denominated revenue base. However, as volume loadings and yield are the primary earnings drivers, loadings are expected to trend higher in 2H24 and FY25. Higher demand from automotive customers, new programmes, supply chain diversification, and contribution from its new Gopeng plant are among the growth catalysts. We advise investors to accumulate on share price weakness and the new semiconductor upcycle.

• FX impact. Unisem sales are mainly denominated in USD terms, but it will be partially hedged by USD purchases which typically make up 40-50% of the COGS. A 1% FX depreciation could result in 2%-3% impact to bottomline, ceteris paribus. Meanwhile, its USD borrowings should see savings in interest costs and FX gains. These, coupled with currency hedging, should help to cushion the negative revaluation of receivables. The margin compression stemming from the negative FX movements can be passed on to customers through renegotiation, revised quotation, engineering, and process efficiency. We factored in the stronger MYR/USD to be in line with our in-house FX assumption to 4.40/4.05/4.20 from 4.50/4.30/4.30, resulting in FY24F- FY26F earnings cut by 11.7%, 10.6%, and 13.4%. Note that we also tweaked our cost assumptions on efficiency gains through process improvements, cost pass-through exercise, and slower revenue growth. Our TP is lowered to MYR3.93 from MYR4.40 (inclusive of a 2% ESG premium), based on an unchanged 30x FY25F P/E at +1.5SD from its 5-year mean.

• 2Q24 earnings recap. Unisem’s 1H24 revenue of MYR759.4m (+3.6% YoY) translated into core earnings of MYR26.7m was below expectations due to margin compression (EBITDA margin compressed to 18.7% (1H23: 20.5%)) stemming from changes in product mix and higher operating costs from additional hiring for expansions.

• Optimism ahead. Management guided for stronger (+8-10%) QoQ revenue and sees potential upside risks from its utilisation in Ipoh, if the recovery gains pace. Headcount is also on a rising trend for three consecutive quarters, reaching 6,359 from 6,067 to cater to rising loadings. Various new programmes, ie MEMS microphone, power management integrated circuit (PMIC), and sensors for industrial and automotive segments will drive growth in 2H. In China, the Chengdu plant is running at near-full capacity, and the installation of equipment and qualification in the Phase 3 plant are in progress. Utilisation rate should improve in the Ipoh plant HoH with better loadings. However, wafer bumping at UAT site was at a loss and will continue to be soft.

• Downside risks to our calls include slower-than-expected orders, technology obsolescence, and unfavourable FX movement.

Source: RHB Research - 9 Oct 2024