Unisem - Slower than expected recover

We attended the company’s post-result briefing last week and came back with the view that the company’s outlook continues to remain challenging due to the global economy weakness, especially the uncertainties in the Euro zone. Management is guiding for a flat YoY 3Q12 while on a full-year basis, the group may only break even at best due to the earlier poor 1H performance. In view of its slower-than-expected recovery, we have slashed our FY12 full year net profit by 93% to RM4.1m in contrast to our earlier optimistic NP estimate of RM60m. The main changes to our FY12 assumptions are 1) a lower group’s utilisation rate to 62% vs 67% previously and 2) an increase in our raw materials price assumptions. Meanwhile, our FY13E net profit has also been lowered to RM29.2m from RM86.4m after adjusting for a now likely slower recovery in the semiconductor industry. To align with our earnings downgrades, our Unisem TP has also been cut to RM1.32 (from RM1.87 previously) based on a targeted Price/Forward BV of 0.8x (-0.75SD below the mean) and consequently, we have also downgraded our rating for the stock to a MARKET PERFORM from OUTPERFORM previously.  

Weak 2QFY12 results. Unisem recorded a lower utilisation rate of around 60% in 2QFY12, although, which was  slightly better than 1Q12 and this had contributed to a 10% increased in its sales revenue in 2Q12. On a QoQ basis, most of its high-margin products reported a 0.5ppt-2.8ppt increase in sales (2.8ppt from 35.3% for Leadless, 0.5ppt from 3.2% for WLCSP and 0.7ppt from 2.6% for Bumping) while Testing contribution remained unchanged at 17.1%. However, Leaded and Array both reported a lower percentage of revenue contribution (1.9ppt-3.1ppt) to the group to 34.3% and 2.6% respectively in 2Q12 due to the switch in product mix towards more cost saving and advanced products like Leadless and WLCSP packaging. 

Expecting flattish YoY growth in 3QFY12. Management expects a flat 3Q in the top and bottom lines due to the weak sentiment across the regions (Europe, China and USA). Furthermore, the visibility in the industry has reduced to 2-3 months now from 3-6 months previously, with the consequence that most of its customers themselves have lost the ability to foresee the market for a longer term. Product-wise, the group still see strength in high growth and high  margin  products  such  as  WLCSP  and Modules (Wire Bond and Flip Chip),  which are driven by the growth in Apple and Samsung products. This is in line with our view that high growth and high margin products will be able  to  contribute more  sales  volume and better margins to the group going forward. 

Industry outlook. Although the semiconductor industry has shown signs of recovery since Feb 2012, we believe the industry may potential post a slower than expected growth due to the persistent global weak sentiments. 

Consumer Electronic leading the market. Consumer Electronic is among its other market segments (Communication, PC, Industrial and Auto)  that  recorded  an  increase  of  3ppt  in  revenue  from  29%  in  1Q12  to 32% in 2Q12 due to the rising demand for tablet PCs and smart phones. Unisem also posted a forex loss of RM2.45m due to the strengthening of RM against USD. The group’s CAPEX  increased from RM17.8m in 1Q12 to RM33.1m in 2Q12 due to the expansion of its Phase 2 plant in Chengdu and the concentration on high growth and high margin products (WLCSP and Flip Chip).

Source: Kenanga