Unisem (M) Berhad’s (UNISEM) 1QFY24 results met expectations. Its 1QFY24 revenue grew by 3% on billings to new customers but core net profit fell 14% on forex losses, salary adjustments and lumpy annual bonuses. It guided for sequential revenue growth of 10% to 12% driven largely by its Chengdu plant.
Kenanga Investment Bank (Kenanga), in its Result Note today (Apr 29), said they keep their forecasts but raised their TP by 25% to RM3.70 (from RM2.95). Maintain MARKET PERFORM.
UNISEM’s 1QFY24 core net profit of RM8.5m (-14.1% YoY) only accounted for 5% of both our full-year forecast and the full-year consensus estimate. However, Kenanga deems it within expectations as we expect stronger quarters ahead.
YoY, its 1QFY24 revenue inched 3% higher, driven by the commencement of projects with new customers during the quarter, involving products such as: (i) sub-6GHz radio frequency power amplifiers used in Korean smartphones, and (ii) high-powered RF transmission chips for a US customer. Additionally, robust utilisation in the Chengdu plant was supported by existing European (MEMS microphone related) and Chinese domestic customers (smartphone related), contributing to a healthy utilisation of c.75%.
However, the loading volume in its Ipoh plant remained soft, with only c.50% utilisation rate for both test and assembly, and wafer bumping operations. However, its 1QFY24 core net profit declined 14%, weighed down by forex losses (RM4m due to USD loans), additional costs related to staff bonuses and a slight increase in headcount for its Chengdu plant.
QoQ, its 1QFY24 the top line grew by 4% (or +3.6% in USD terms), slightly above the group’s flattish guidance, attributed to the commencement of new customers’ products.
However, its core net profit plunged by 70%, primarily due to: (i) a high base in 4Q due to the year-end peak period, (ii) a seasonally low 1Q owing to the Chinese New Year holidays, and (iii) wage adjustments and bonus payouts.
Outlook. The group guided for sequential revenue growth of 10% to 12%, mainly driven by its Chengdu plant as new and existing customers continue to ramp up at a gradual pace. The Phase 3 plant in Chengdu, twice the capacity of Phases 1 and 2 combined, has initiated equipment installation and qualification processes.
The growth rate also assumes that utilisation in Ipoh remains soft and has bottomed out.
Meanwhile, it is in the early stages of onboarding a new customer related to NAND flash for its Ipoh plant, expected to commence pilot run in 2HFY24, coinciding with the setup of new pilot lines for internal qualification in its new Gopeng plant by May 2024.
Forecasts. Maintained.
Valuations. Kenanga raises their TP by 25% to RM3.70 (from RM2.95), having rolled forward our valuation base year to FY25F (from FY24F). Kenanga’s valuation basis remains unchanged at 29x PER, in line with its peers’ average. There is no adjustment to TP based on ESG given a 3-star ESG rating as appraised by them.
Investment case. Kenanga likes UNISEM for: (i) its healthy presence in the power module business, (ii) being able to benefit from the China+1 initiative, and (iii) a strong balance sheet to support its expansion plans. However, its fundamentals have been fully priced in at the current share price.
Risks to Kenanga’s call include: (i) a weaker-than-expected recovery in global consumer electronics demand; (ii) intensifying US Sino chip wars; and (iii) a steep depreciation of the USD against the MYR.
Meanwhile, MIDF Research said they are maintaining their NEUTRAL recommendation on Unisem with a revised target price of RM3.41 in conjunction with the release of 1QFY24 financial results.
There was minimal recovery seen in the quarter-in-review as utilization rate at Ipoh’s operation remained weak. The pace of rebound in FY24 will largely depend on the China operation. On a separate note, the construction for Phase 1 of Gopeng’s operation will be completed soon while internal qualification to start in May 2024.
Slight improvement on a year-over-year basis. 1QFY24 normalised earnings improved by +7.6%yoy to RM12.5m. This lacks ours and consensus expectations, coming in at only 6.2% and 7.5% of the full year FY24 earnings respectively.
The underperformance was mainly caused by the soft demand which translated into a slow recovery in the industry. This was further impacted by the upward revision in wages.
Meanwhile, there were no major changes in the group’s 1QFY24 revenue mix by market segments. The consumer market remains the largest segment at 31%. This was followed by communications (24%), automotive (18%), industrial (17%) and PC (11%).
Adjustment in earnings estimates. After taking into consideration Unisem’s 1QFY24 financial performance, MIDF is inputting a more conservative pace of recovery in FY24. As such, we lower FY24 to FY26 earnings by between -6.7% and -32.9%.
Adjustment in target price. MIDF are rolling forward their valuation based year to FY25 and attain a higher target price of RM3.41 (previously RM3.13). This is despite the downward adjustment in earnings estimates as we anticipate FY25 earnings to come in higher. Our target price is derived by pegging FY25 EPS of 13.6sen against unchanged PER of 25x.
Anticipating improvement in the successive quarters. While MIDF acknowledges that 1QFY24’s performance was rather muted, they expect improvement in the quarters ahead. This will be supported by the group’s operation in China which has seen a more encouraging pace of recovery as compared to that of Ipoh.
