Unisem shares rise to highest level since 2018 on solid 2Q earnings, upgrades

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KUALA LUMPUR (Aug 4): Shares in Unisem (M) Bhd gapped up and rose to their highest level since January 2018 this morning following upgrades for the stock after the company's net profit for the second quarter ended June 30, 2020 (2QFY20) jumped more than twofold to RM33.95 million, from RM14.45 million a year earlier, driven by higher sales volume and foreign exchange (forex) gains.

As at 11.07am, Unisem had gained 31 sen or 9.72% to RM3.50, with a market capitalisation of RM2.32 billion. The stock saw some 3.2 million shares traded. The stock earlier rose to a high of RM3.56.

RHB Investment Bank Research upgraded Unisem to “buy" with a higher target price (TP) of RM3.72 from RM2, a 17% upside with an about 3% FY20F yield.

RHB analyst Lee Meng Horng said Unisem’s results for the first half ended June 30, 2020 (1HFY20) were a positive surprise, mainly on a better margin and strong top line following the closure of its Batam plant.

“We expect a similarly strong loading in 2HFY20 on a sustained order pipeline. We also impute higher sales and margin assumptions, leading to higher FY20F-22F earnings,” he added.

Lee said the new TP is based on 25 times FY21F price-earnings ratio (PER) from the previous 15 times — in view of improved optimism, the strong results and a liquidity-driven PER rerating of the sector.

Meanwhile, CGS-CIMB Research also upgraded Unisem to “add”, with a higher TP of RM3.65 (from RM1.60) pegged at a higher 24 times PER in view of improving sentiment and prospects of an earnings recovery in the tech sector.

CGS-CIMB analyst Mohd Shanaz Noor Azam said the research house had rolled over its valuation to end-2021.

Mohd Shanaz noted that the 1HFY20 results beat expectations at 51% and 46% of the research house's and Bloomberg consensus estimates respectively due to higher-than-expected margin delivery in 2QFY20.

“Favourable forex movement and acceleration in 5G (fifth-generation) network deployment are potential catalysts, while delays in 5G network adoption, strengthening of the ringgit against the US dollar and re-escalation of trade tension are key downside risks to our call.”

CGS-CIMB raised its FY20F-22F earnings per share (EPS) by 20-25% to account for higher utilisation and lower operating expenditure (opex).

Meanwhile, Hong Leong Investment Bank (HLIB) Research maintained its "hold" rating of Unisem with a higher TP of RM3.13, from RM2.32, reflecting an upward revision of its earnings forecasts.

HLIB analyst Tan J Young said the TP is pegged at 20 times FY21F EPS. 

“Despite the trade war and Covid-19 risks, Unisem’s prospects are likely to improve with the closure of the loss-making Batam plant, a strengthening US dollar, its gradual synergistic relationship with Tianshui Huatian Technology Co Ltd and a healthy balance sheet.”

Tan warned the share price overhang is a potential risk should Tianshui Huatian Technology dispose of its partial holding to meet the public spread requirement.

As of the time of writing today, there were six "buy" calls and three "sell" calls for Unisem, with a 12-month average TP of RM3.08.

The highest TP was RM4.28, rated by TA Securities, while the lowest was RM1.90, given by MIDF Research.