Unisem (Malasysia) Bhd
(Oct 31, RM1.69)
Downgrade to reduce from add with an increased target price of RM1.54 from RM1.51: Benefiting from restructuring, Unisem posted its third consecutive quarter of profit for the third quarter ended September of financial year 2014 (3QFY14).

Positive earnings momentum could continue. However, with increased macroeconomic uncertainty and a prolonged global semiconductor upturn, there is less earnings visibility in FY15, particularly given Unisem’s broad customer base, with 52% of revenue from the more volatile personal computer (PC), industrial and consumer electronics spaces.  Revenue guidance for 4Q is for flat to a 5% decline quarter-on-quarter (q-o-q).

Unisem reported stronger than expected results for the first nine months (9M) of FY14. Core net profit was RM46 million compared to a core net loss of RM16 million a year ago.  The earnings turnaround was largely due to margin improvement rather than revenue growth, as the top line remained flattish at RM753 million, up 1.3% year-on-year (y-o-y). The margin improvement was largely the result of Unisem’s restructuring over the past two years, involving reductions in headcount, terminations of older packages and the pairing down of debt.

Core earnings for 9MFY14 were ahead of expectations, accounting for 104% of our and 126% street forecasts due to better than expected margins.  Earnings before interest, taxes, depreciation and amortisation (Ebitda) margin for the 9M came in at 22.2% compared with our forecast of 19.4%.  Unisem also announced a dividend per share of two sen. Profit for 3Q came in at RM27.8 million. The stronger earnings were due to sequential revenue growth of 8.6%, in line with management’s guidance of high single-digit growth.  The 3QFY14 Ebitda margin likely expanded in tandem with the revenue increase, as we believe any impact from the cost-rationalisation programme would be limited at this stage.

We raise our earnings per share forecasts by 21.3% for FY14, 85.8% for FY15 and 67.8% for FY16 to reflect the better than expected margin improvement.  — Affin Hwang Capital, Oct 31

This article first appeared in The Edge Financial Daily, on November 3, 2014.