AFFIN Hwang Capital has maintained its sell rating on Unisem (M) Bhd with a revised target price of RM1.38 on lower revenue due to Covid-19 disruption.
Its analyst Kevin Low said: “Unisem remained in the red in 1Q20 despite the absence of one-off related charges resulting from the termination of its Batam operations. Revenue and margins in 1Q20 fell to multi-year lows, impacted by plant shutdowns as a result of Covid-19. The impact could be even more significant in 2Q20 considering that it only saw the tail-end effects of the lockdown in Malaysia during 1Q20.”
Unisem reported a 1Q20 headline loss of RM2.8 mil but core losses of RM7 mil after excluding forex gains. While management had guided for a weak quarter because of the earlier plant shutdown in Chengdu, China because of Covid-19, results appear to be grossly below both street and Affin Hwang’s expectations.
While Unisem’s China factory had resumed operations in early February, the Ipoh factory was impacted by the Movement Control Order (MCO) from March 18. Management had already earlier guided for the possibility of supply-chain disruptions, which Affin Hwang thinks would have worsened as Covid-19 became a pandemic.
Notably, despite the favourable exchange rates, 1Q20 revenue fell sharply both on a quarter-on-quarter (qoq) and year-on-year (yoy) basis, and reverted to the levels last seen in 3Q14.
“We think that margins are likely to remain weak in the coming quarters, as revenue comes under pressure. Earnings before interest, taxes, depreciation, and amortization (EBITDA) margins also fell to multi-year lows on the back of lower operating leverage. Effectively, the impact from Covid-19 has wiped out the positive effects from the Batam restructuring, where management was eliminating a loss-making unit,” said Low.
Taking into account the results, Affin Hwang cut its earnings per share (EPS) projections and now forecast that Unisem will end with a loss in 2020. It thinks that there remains sharp downside risk considering the global slowdown as a result of Covid-19. Upside risks include a sharp depreciation of the RM, which will positively impact earnings, increased outsourcing opportunities, and shareholder Huatian Technology increasing business flows to Unisem.
Meanwhile, MIDF Research is maintaining its neutral recommendation on Unisem as it expects production activities will continue to ramp up after the Covid-19 induced disruption.
The group’s 1Q20 financial performance was adversely impacted by the outbreak which led to disruption in production activities at both the Ipoh and Chengdu plants. Subsequent to the disruption, the production activities have picked up pace.
This is expected to continue in the coming quarters. Higher production activities would also enable the group to make up for the order backlog. In addition, the ramp in production activities will be supported by the demand of 5G infrastructure and portables.
However, as the pandemic has yet to subside, the research house does not discount further interruption in the value chain. The pandemic will also affect the demand from end-users.
“We view that the timely cessation of the Batam operation would help to preserve the group’s cash balance and prevent further dilution to its earnings. At this juncture, we view that the downside risk to earnings is rather limited,” said MIDF Research analyst Martin Foo.
Unisem’s 1Q20 normalised loss came in at RM5.7 mil after excluding the gain on foreign exchange. The lower earnings mainly stemmed from lower revenue of RM273.3 mil (-9.8% yoy).
The weaker revenue was led by the adverse impact of MCO as well as lower sales volume from its Batam operation in view of the planned cessation of operation on March 31. In addition, the group also incurred higher net finance cost and higher effective tax rate. All in, Unisem’s loss-making 1Q20 came in below MIDF and consensus expectations.
Unisem’s capital expenditure (capex) for the quarter increased by 17.9% yoy to RM84.8 mil. This was mainly channelled to its Chengdu plant to increase production capability and capacity.
Nonetheless, the group’s management guided that the full year FY20 capex could come in lower as compared to FY19 as the management remains cautious on the outlook for 2H20 in view of the pandemic. In addition, the group will also seek to repurpose some of the assets in Batam for its existing production in Ipoh and Chengdu.
MIDF is lowering revenue assumptions across all the product segments to FY20 and FY21 to take into account the impact of the Covid-19 pandemic. As a result, FY20 and FY21 earnings estimates have been reduced to RM51.5 mil and RM67.1 mil respectively.
MIDF is rolling forward its valuation based year to FY21. Coupled with its earnings adjustments, it derives a new target price of RM1.90 (previously RM2.09). This is premised on pegging FY21 earnings per share (EPS) of 9.1 sen against an unchanged forward price-earnings ratio (PER) of 20.9x. Its target PER is the group’s two-year historical average PER. — April 30, 2020
