Stock Name: UNISEM
Company Name: UNISEM (M) BHD
Unisem (M) Bhd
(Aug 2, RM1.43)
Maintain sell at RM1.40 with target price of RM1.12 from 99 sen: Weak top line growth has continued to suppress earnings. Despite registering a respectable 5% growth quarter-on-quarter, Unisem's sales are still 7% lower than 2HFY10's earnings.
Unisem as a back-end test and assembly manufacturer receives orders from major US and Europe semiconductor players. Softening demand for back-end manufacturing has pushed average utilisation rates down to 60% from 65% a quarter ago. At 60%, the current utilisation rate is at its lowest point since 2QFY09. High depreciation charges are chipping away at profit after last year's investment in Chengdu, China, and new machines. Depreciation charges in this quarter are triple its net profit.
Total capital expenditure for 2HFY11 of RM42.9 million is only 60% of last year's capex. Lower capex suggests that Unisem's 2011/12 sales growth will not be able to compete with that of 2010. Lower investments will accelerate average selling price (ASP) erosion.
The management is still very bullish on China, and is looking to grow and expand Unisem Chengdu by another 30% to 40%. Unisem Chengdu now contributes more than 50% of Unisem's earnings before interest, tax, depreciation and amortisation (Ebitda). A lower effective tax rate (6%), also implies that Unisem's Chengdu operation is becoming increasingly important for the group.
Japan's semiconductor supply chain has recovered since the earthquake according to Unisem's management and is unlikely to have a significant impact on its business.
We have kept our FY11 full-year earnings forecast of RM83.4 million unchanged, which is also in line with the management's targeted FY11 RM250 million Ebitda. We lower our FY12 and FY13 net earnings forecasts by 17% and 8% on the back of toned-down capital expenditure (which accelerates ASP erosions and margin compression) and lower US dollar assumptions. We are forecasting margins will revert to historical mean levels in FY12.
The management expects 2QFY11's lacklustre performance to stretch into 3QFY11.
We increase our fair value from 99 sen to RM1.12, based on eight times price-earnings ratio, to Unisems's average FY11/FY12 earnings per share. Our previous fair value was based on FY11 trough earnings. Our assessments seem to indicate that the current down cycle will not be as severe as 2009. For this reason, it is unlikely like that Unisem will trade at trough valuations. Our fair value of RM1.12 implies a target price-to-book value of 0.7 times. There is still a significant downside (20%) to the current price. Unisem remains a 'sell'. ' UOBKayHian, Aug 2
This article appeared in The Edge Financial Daily, August 3, 2011.
Company Name: UNISEM (M) BHD
| Research House: UOB | Price Call: SELL | Target Price: 1.12 |
Unisem (M) Bhd
(Aug 2, RM1.43)
Maintain sell at RM1.40 with target price of RM1.12 from 99 sen: Weak top line growth has continued to suppress earnings. Despite registering a respectable 5% growth quarter-on-quarter, Unisem's sales are still 7% lower than 2HFY10's earnings.
Unisem as a back-end test and assembly manufacturer receives orders from major US and Europe semiconductor players. Softening demand for back-end manufacturing has pushed average utilisation rates down to 60% from 65% a quarter ago. At 60%, the current utilisation rate is at its lowest point since 2QFY09. High depreciation charges are chipping away at profit after last year's investment in Chengdu, China, and new machines. Depreciation charges in this quarter are triple its net profit.
Total capital expenditure for 2HFY11 of RM42.9 million is only 60% of last year's capex. Lower capex suggests that Unisem's 2011/12 sales growth will not be able to compete with that of 2010. Lower investments will accelerate average selling price (ASP) erosion.
The management is still very bullish on China, and is looking to grow and expand Unisem Chengdu by another 30% to 40%. Unisem Chengdu now contributes more than 50% of Unisem's earnings before interest, tax, depreciation and amortisation (Ebitda). A lower effective tax rate (6%), also implies that Unisem's Chengdu operation is becoming increasingly important for the group.
Japan's semiconductor supply chain has recovered since the earthquake according to Unisem's management and is unlikely to have a significant impact on its business.
We have kept our FY11 full-year earnings forecast of RM83.4 million unchanged, which is also in line with the management's targeted FY11 RM250 million Ebitda. We lower our FY12 and FY13 net earnings forecasts by 17% and 8% on the back of toned-down capital expenditure (which accelerates ASP erosions and margin compression) and lower US dollar assumptions. We are forecasting margins will revert to historical mean levels in FY12.
The management expects 2QFY11's lacklustre performance to stretch into 3QFY11.
We increase our fair value from 99 sen to RM1.12, based on eight times price-earnings ratio, to Unisems's average FY11/FY12 earnings per share. Our previous fair value was based on FY11 trough earnings. Our assessments seem to indicate that the current down cycle will not be as severe as 2009. For this reason, it is unlikely like that Unisem will trade at trough valuations. Our fair value of RM1.12 implies a target price-to-book value of 0.7 times. There is still a significant downside (20%) to the current price. Unisem remains a 'sell'. ' UOBKayHian, Aug 2
This article appeared in The Edge Financial Daily, August 3, 2011.
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