UNISEM: outperform at RM2.24, TP of RM2.77

Unisem (M) Bhd
(Aug 3, RM2.21)
Maintain outperform at RM2.24 with a target price of RM2.77: We reiterate outperform with our target price pegged at RM2.77 based on 1.8 times P/BV and BV/share of RM1.54.

Unisem’s revenue grew for the sixth consecutive quarter driven by the Ipoh, Europe, Chengdu and Batam operations, which more than offset the marginal loss of RM188,000 incurred by UAT. The management expects 3QFY2010 revenue to grow 5% to 8% quarter-on-quarter on the back of strong bookings across all product lines. All its operations are currently in line with, if not outperforming its budgeted revenue.

With capital expenditure (capex) for 2QFY2010 at RM86.4 million, it brings the total capex in 1HFY2010 to RM148.3 million, much higher than FY2009’s RM135.5 million. The bulk of Unisem’s capex is for the expansion of its China’s operation. Capex in 2HFY2010 is expected to be much lower, around RM64.5 million, bringing its total capex for FY2010 to about RM200 million.

The lower capex in 2HFY2010 is due to the longer lead time for machinery purchase with most of the machines expected to be delivered in FY2011. The capacity utilisation rate is currently at 85% with all newly installed capacity booked.

We view positively of the qualification of WLSCP and QFN packaging with Broadcom. It is seen as another step forward for Unisem to become the supplier to Broadcom since it is a major player in semiconductors for wired and wireless communications with customers that include Alcatel, Apple, Nokia and Samsung. The Ipoh operation will focus on WLCSP package while the Chengdu China operation will focus on QFN package.

Unisem Batam will focus on automotive and BGA products. The automotive business is expected to grow with several products to be qualified for Bush and Melexis. The qualification is expected to start production in FY11. Their newly introduced LFGA package is expected to garner interest from its customers as it provides a cheaper alternative to FBGA packages which will provide savings up to 40% even for gold wire.

Work for Chengdu’s Phase 2 expansion is expected to start in 3QFY2010 with Phase 2A to be completed by 1QFY2011. Phase 2A, which is expected to increase the production area by 130,000 sq feet, will cater for wafer bumping, wafer level CSP, modules, BGAs and MEMs packaging.

The management guided that Unisem’s dividend policy should return to its pre-crisis level of 10% of its par value of 50 sen. — Inter-Pacific Research, Aug 3