UNISEM : Initiate coverage with BUY call at RM1.90, TP of RM2.50

Unisem — no need to hit the pause button

Unisem (M) Bhd
(Oct 8, RM1.88)
Initiate coverage with buy call at RM1.90 and target price of RM2.50: Unisem is a global provider of semiconductors with operations in Ipoh, Malaysia; Chengdu, China; Crumlin, UK and Sunnydale, USA, offering a variety of products and services such as full turnkey solutions for wafer probes, manufacturing of leadframe and testing.

Industry performance remained strong as evident by the 32.6% year-on-year (y-o-y) growth of worldwide semiconductor sales in August 2010. The Semiconductor Industry Association had forecasted growth of 28.4% y-o-y in 2010. It also forecasted a 6.3% y-o-y and 2.9% y-o-y growth in 2011 and 2012 respectively.

The rebound in worldwide semiconductor sales has had a significant impact on Unisem as its 2Q10 revenue and net profit grew by 40.8% y-o-y and 100.3% y-o-y respectively. We expect that revenue and net profit will increase by 30% y-o-y and 128% y-o-y respectively for FY10.

We like the fact that Unisem’s margins have been consistent and it is conservative in the management of its balance sheet. Average earnings before interest, tax, depreciation and amortisation (Ebitda) margin since 2Q09 was 26% and average net profit margin was 11.1%. Net gearing stood at 0.33 times as of June 30, 2010, which is within the industry norm of a growing semi-mature company.

We believe that Unisem has a positive outlook as the fears of oversupply and overcapacity are undue. While US inventories are normalising, US imports have not declined and business confidence is increasing.

We believe that the weakening US dollar against the ringgit will have a marginal impact on Unisem as the loss of revenue due to translation will be offset by cheaper raw materials and an expected increase in demand for the final electronic products. Historically we have not observed any correlation between US dollar-ringgit exchange rate and revenues.

We initiate our coverage of Unisem with a buy recommendation with a target price of RM2.50. While current data suggests that growth rates are moderating, we share consensus’ view that the industry will continue to be positive for the next two years, especially in light of the growing popularity of smartphones such as iPhone 4 and Android-based models. Our target price is derived by pegging FY12 EPS to 11 times PER, which is the average PER of its peers. — MIDF Research, Oct 8


This article appeared in The Edge Financial Daily, October 11, 2010.