Trade Wise: Unisem expects growth momentum to continue

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unisem-chia_tw_1057GLOBAL semiconductor sales have gained momentum over the last two years and show no signs of abating, thanks to growing demand for chips, especially with the surge in the use of smartphones.

This is positive for the industry players, but the question is, can the upward trajectory be sustained?

Unisem (M) Bhd group managing director John Chia Sin Tet believes it can, saying the growth should go on for “quite a while more”, largely due to a recovery in the US economy.

A recent report by the Semiconductor Industry Association shows that on a year-on-year basis, global sales have climbed for 21 consecutive months and remain strong in most regions and product categories.

“The US economic recovery looks real this time … in fact, we had braced ourselves for a slowdown [in sales] in the fourth quarter as that is seasonal, but surprisingly, it didn’t happen,” Chia tells The Edge.

Unlike in previous years, Unisem’s sales continued to grow in 4QFY2014, he says, adding that he is optimistic the company will be able to achieve double-digit growth in revenue and net profit in the financial year ending Dec 31, 2015 (FY2015), thanks to the external factors and the execution of its new business model. “There is much better earnings visibility for the next few quarters, so our top line and bottom line will grow fairly significantly this year.”

The semiconductor packaging and test service provider has transitioned into a leaner entity by moving away from traditional consumer electronic products and towards higher-margin packages.

It scaled down its operation in Batam, Indonesia, trimming its headcount by 30% to about 7,000.

The transformation saw a reversal of fortunes at Unisem (fundamental: 1.3; valuation: 0.60) with the company returning to the black in 1QFY2014 after two consecutive years of losses.

In 4QFY2014 ended Dec 31, Unisem posted a net profit of RM21.19 million compared with a net loss of RM90.8 million a year ago while revenue rose to RM285.38 million from RM247.12 million previously.

Net profit for the full year came in at RM68.42 million compared with a net loss of RM105.37 million a year ago on the back of a 4.8% rise in revenue to RM1.04 billion.

Chia notes that Unisem’s average utilisation rate is about 65% while the production capacity for its high-margin packages — wafer bumping, wafer level chip scale and micro-electromechanical systems, which have exposure to the smartphone segment — is at more than 90%.

“This year, our plan is to continue doing what we did last year — shift more and more into newer technologies where the profit margins are higher,” he says, adding that Unisem will soon be moving into a net cash position.

Nevertheless, Unisem will spend more prudently this year, expanding only when it reaches “optimum” utilisation levels.

unisem-chart_tw_1057Indeed, there are concerns over the impact of a slowdown in the global semiconductor industry, which is cyclical in nature, on local players. However, Chia points out that Unisem is better positioned to handle “small dips” in the economic cycle as it has tweaked its product and customer profiles as part of its new business model.

He believes the company’s strategy to cut costs and headcount will buffer the effects of a steep decline in demand on Unisem. “I think the risk of a sharp drop is lower and we are now able to react a lot faster.”

Based on Bloomberg’s analyst poll, there are eight “buy” calls, one “neutral” and one “sell” on the company with a consensus target price of RM2.36. Unisem closed at RM2.10 last Friday, up more than twice from RM1.03 a year ago.

Its price-earnings ratio has risen in tandem to 21 times. By comparison, Malaysian Pacific Industries Bhd and Globetronics Technology Bhd are trading at 19.3 and 21.5 times respectively.

Affin Hwang Capital Research analyst Kevin Low, the contrarian with the “sell” call, says in a Feb 13 note that Unisem’s strong share price performance over the past year largely reflects its turnaround in FY2014. However, he believes that with a PER of 21 times, the risk-reward ratio is unfavourable to Unisem.

“Revenue growth appears limited and likewise its cost-cutting measures, which have been the key to its turnaround,” says Low, who has a target price of RM1.60 for the company.


Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on March 9 - 15, 2015.