KUALA LUMPUR: Semiconductor packaging and test services provider Unisem (M) Bhd, which returned to the black in the first quarter ended March 31 of financial year 2014 (1QFY14) after two consecutive years of losses, is confident of achieving double-digit revenue growth this year.

“We’ve just closed our third financial quarter and the fourth quarter looks good as well. So, this year will be a complete turnaround [in fortunes for Unisem],” group managing director John Chia Sin Tet told The Edge Financial Daily in an interview.

“I think our earnings before interest, taxes, depreciation and amortisation (ebitda) margins will continue to improve in line with higher utilisation rates [for our leadless, wafer-level packaging and test services which have exposure in the smartphone segment],” he said.

Unisem reported a net profit of RM20.11 million in the six months ended June 30, 2014 (1HFY14) compared to a net loss of RM13.94 million a year ago. This was despite recording lower revenue of RM479.63 million from RM496.65 million.

The group’s bottom line for FY13 ended Dec 31 and FY12 took a hit from the recognition of impairment losses on goodwill and assets, retrenchment costs, provision for write-off on inventory, as well as lower sales volume.

However, it has transitioned to a leaner business model with a 30% cut in labour headcount to about 7,000 currently as a result of the scaling down of its Batam, Indonesia factory in which it got rid of its resource-consuming legacy products that had contributed little to its revenue.

“At the moment, the Malaysian segment contributes about 45% to our sales, another 30% comes from China and the rest from Batam,” said Chia.

He said Unisem is now well-positioned to take advantage of the continuous upward movement of global semiconductor sales, of which smartphone adoption is a driving catalyst for the sector.

“We are smack into communications ... about 50% of our chips go into smartphones,” Chia said, adding that as Unisem is part of Apple Inc’s supply chain, it is a beneficiary of Apple products such as the recently launched iPhone 6.

Apart from the smartphone segment, another 15% goes to the automotive market and the rest computer peripherals.

Unisem is expected to see improving earnings visibility from its portfolio shift towards higher-margin packages and away from legacy consumer electronic products that were “very good to us in the initial years”, said Chia.

“We’ve also progressively blended our customer profile to include Tier-1 players along with our existing integrated circuit design houses to give us more stable utilisation rates and [better] product profile,” he said.

Tier-1 players are large multinational semiconductor players such as Qualcomm Inc, Intel Corp and Freescale Semiconductor Inc.

Going forward, Chia said Unisem’s focus will be on improving its bottom line by increasing its utilisation rates and production capacity for its new packages — in wafer bumping, wafer level chip-scale package and microelectromechanical systems, being the typical electronic components in smartphones.

“These are the newer packages where our competitors are not playing yet. I think we have a head start over competition as these are the packages that give higher average selling prices (ASP),” he said, adding that over time, the erosion of ASP in legacy packages had resulted in thinning margins for the group.

Unisem’s utilisation rate for its packages now hovers at 75%, from 65% at the beginning of this year.

Chia said as some RM400 million had been spent on increasing production capacity for these new packages, the group will be more “restrained” in its capital expenditure (capex) for FY14 as it is currently “wrapping up” its production.

Unisem has a policy of capping its capex at about 25% to 30% of its ebitda.

In a report dated Sept 4, 2014, TA Securities is maintaining an “overweight” recommendation on the semiconductor sector, with a “buy” call on Unisem and a target price of RM2.10 per share as it is a potential beneficiary of strong consumer demand for the iPhone 6 and iPhone 6 Plus as well as the impending launch of Apple Watch in early 2015.

Unisem shares closed down 1.35% to RM1.46 last Friday, but 69% higher than 86.5 sen a year ago. This gave it a market capitalisation of RM984.38 million.

This article first appeared in The Edge Financial Daily, on October 13, 2014.