Results Review (Member of Alliance Bank group) PP7766/03/2013 (032116) 8 November 2013 Analyst Toh Woo Kim wookim@alliancefg.com +603 2604 3917 12-month upside potential Previous target price 0.89 Revised target price 0.87 Current price (as at 7Nov) 0.88 Capital upside (%) -1.1 Net dividends (%) 2.3 Total return (%) 1.2 Key stock information Syariah-compliant? Yes Market Cap (RM m) 589.9 Shares outstanding (m) 674.2 Free float (%) 61.0 52-week high / low (RM) 1.15 / 0.85 3-mth avg volume ('000) 784.5 3-mth avg turnover (RM m) 0.7 Share price performance 1M 3M 6M Absolute (%) 0.6% -5.4% -5.9% Relative (%) -1.0% -6.6% -7.7% Share price chart Unisem 3QFY13: Downsizing its workforce Neutral Technology Bloomberg Ticker: UNI MK Bursa Code: 5005 Unisem s 9MFY13 results came in within our expectation but missed consensus. Given the challenging outlook, Unisem has initiated a voluntary separation scheme for its staffs in its Batam plant and also shut down its Europe operation in order to rationalise cost. As such, we now forecast a larger net loss of RM31.4m for Unisem in FY13 due to additional provisions and asset write-off, but FY14-15 earnings are raised by 21-28% instead, given the lower labour costs and overhead going forward. Correspondingly, our TP is reduced to RM0.87 (from RM0.89) based on 0.6x P/B. Maintain Neutral. Narrowing losses, but no sign of demand recovery yet Unisem reported a net loss of RM14.6m for its 9MFY13 result. This is within our full-year forecast of RM18.0m net loss but outside consensus expectation of RM0.4m net loss. Unisem s losses have been narrowing q-o-q as management took measures to rationalise certain low margin and unprofitable products. Furthermore, the company has also been reducing its workforce in order to offset the impact of minimum wages policy, which has affected its Malaysia and Indonesia plants. See Figure 8. Inventory-to-sales ratio and capacity utilisation rates of its plants have dipped slightly in 3QFY13. See Figures 5 & 6. Key takeaways from analyst briefing Unisem expects outlook for 4QFY13 to be challenging as there are no clear indications of recovery in the semiconductor market yet. As such, management has undertaken several measures to further cut down its costs. These include headcount reduction of approximately 350 staffs. Its subsidiary in Batam, PT Unisem, has always been making losses as it has a relative high labour cost structure. Hence, management has initiated a voluntary separation scheme in October in order to reduce staffs that are mainly involved in support functions. Estimated provision for retrenchment cost (which will be provided in 4QFY13) is about RM8.0m. For now, Unisem has no intention to shut down its Batam plant as the plant is important to serve several key customers, particularly in the automotive segment. Unisem has ceased its Europe operations in late September given the significant decline in volume of customer orders and sales revenue. Also, its plant there no longer serves its purpose as an enabler to develop customer base in Europe. Production will be stopped on 20th December 2013 and all staff will be made redundant. Estimated redundancy payment is about RM2.8m, while there will also be asset write-off amounting to about RM4.2m. In 9M2013, Unisem has only spent about RM32.2m of capex. Given the weak outlook, it expects capex amount to remain relatively small in the next few quarters as well. Current capacity utilisation rate is also low at about 55-60%. Impact on estimates We now project a larger net loss of RM31.4m in FY13 (vs. net loss of RM18.0m previously) in view of the additional provision for staff retrenchment and asset write-off. Nevertheless, our FY14-15 forecasts are raised slightly by 20.5-27.6% to reflect the lower labour costs and overhead after the retrenchment exercise. Maintain NEUTRAL with lower revised TP of RM0.87 Post earnings adjustment, our TP for Unisem is reduced slightly to RM0.87 (from RM0.89) based on P/B of 0.6x, at a 50% discount to peers average. Given challenging earnings growth prospects and no sign of demand recovery in the near term, we maintain our Neutral recommendation on Unisem. All required disclosure and analyst certification appear on the last two pages of this report. Additional information is available upon request. Redistribution or reproduction is prohibited without written permission
Results Review Unisem 8 November 2013 SNAPSHOT OF FINANCIAL RESULTS Figure 1 : Results commentaries % y-o-y change % q-o-q change 9MFY13 9MFY12 % y-o-y change 3QFY13 3QFY12 Comments Key financial highlights Revenue (RM m) 246.8 283.0-12.8-0.1 743.4 822.5-9.6 Lower sales volume coupled with decrease in ASP arising mainly from changes in product mix. Operating profit (RM m) 4.2 14.6 71.4-23.5 2.0 0.3 519.4 Helped by phasing out of unprofitable products. Pretax profit (RM m) (0.5) 9.1 n.m. n.m. (12.1) (15.4) n.m. Net profit (RM m) (0.6) 8.3 n.m. n.m. (14.6) (12.8) n.m. Still in the red Core net profit (RM m) (0.6) 8.3 n.m. n.m. (14.6) (12.8) n.m. Per share data EPS (sen) (0.1) 1.2 n.m. 83.9 (2.2) (1.9) n.m. Core EPS (sen) (0.1) 1.2 n.m. 84.6 (2.2) (1.9) n.m. Net DPS (sen) 0.0 0.0 0.0 0.0 BV/share (RM) 1.54 1.55 1.54 1.55 Margins Pretax (%) (0.2) 3.2 (1.6) (1.9) Net profit (%) (0.3) 2.9 (2.0) (1.6), Alliance Research Figure 2 : Earnings revision Previous EPS Sen Revised EPS Sen Change % 2013F -2.7-4.7 n.m 2014F 3.7 4.3 27.6 2015F 6.7 7.3 20.5 Source: Alliance Research Figure 3 : Key financial data FYE 31 Dec FY11 FY12 FY13F FY14F FY15F Revenue (RM m) 1,160.9 1,091.9 1,018.9 1,042.8 1,109.8 EBITDA (RM m) 161.0 155.0 157.8 219.2 243.2 EBIT (RM m) 1.8 (9.2) (9.6) 46.7 65.6 Pretax profit (RM m) 14.4 (35.4) (27.5) 31.9 54.8 Reported net profit (RM m) 19.9 (32.3) (31.4) 28.9 49.5 Core net profit (RM m) 19.9 (11.5) (31.4) 28.9 49.5 EPS (sen) 2.9 (4.8) (4.7) 4.3 7.3 Core EPS (sen) 2.9 (1.7) (4.7) 4.3 7.3 Alliance / Consensus (%) n.m. 85.5 99.9 Core EPS growth (%) (89.1) (158.0) (172.3) 192.0 71.6 P/E (x) 29.7 (51.2) (18.8) 20.4 11.9 EV/EBITDA (x) 6.5 6.6 5.8 3.8 3.0 ROE (%) 1.8 (1.1) (3.1) 2.9 4.8 Net gearing (%) 41.0 40.9 32.7 24.0 13.0 Net DPS (sen) 2.0 2.0 2.0 2.5 2.5 Net dividend yield (%) 2.3 2.3 2.3 2.9 2.9 BV/share (RM) 1.62 1.52 1.46 1.48 1.52 P/B (x) 0.5 0.6 0.6 0.6 0.6 Source: Alliance Research, Bloomberg 2
Results Review Unisem 8 November 2013 FOCUS CHARTS Figure 4 : Quarterly revenue vs. growth Figure 5 : Inventory to sales ratio RM m 400 Revenue (LHS) Growth (q-o-q) 60% 0.6 X 350 300 250 40% 20% 0.5 200 0% 150 100 50 0-20% -40% -60% 0.4 0.3, Alliance Research, Alliance Research Figure 6 : Capacity utilisation rate Figure 7 : End-user market segment (3QFY13) % 90 Automotive, 15% 85 80 75 70 65 60 55 Industrial, 12% Computers, 18% Consumer Electronics, 27% Communicati on, 28% 50 45 Figure 8 : Total headcount Figure 9 : Capex 11,000 120 10,000 9,000 8,000 7,000 100 80 60 6,000 40 5,000 20 4,000 1Q07 3Q07 0 3
DISCLOSURE Results Review Unisem 8 November 2013 Stock rating definitions Strong buy - High conviction buy with expected 12-month total return (including dividends) of 30% or more Buy - Expected 12-month total return of 15% or more Neutral - Expected 12-month total return between -15% and 15% Sell - Expected 12-month total return of -15% or less Trading buy - Expected 3-month total return of 15% or more arising from positive newsflow. However, upside may not be sustainable Sector rating definitions Overweight Neutral Underweight - Industry expected to outperform the market over the next 12 months - Industry expected to perform in-line with the market over the next 12 months - Industry expected to underperform the market over the next 12 months Commonly used abbreviations Adex = advertising expenditure EPS = earnings per share PBT = profit before tax bn = billion EV = enterprise value P/B = price / book ratio BV = book value FCF = free cash flow P/E = price / earnings ratio CF = cash flow FV = fair value PEG = P/E ratio to growth ratio CAGR = compounded annual growth rate FY = financial year q-o-q = quarter-on-quarter Capex = capital expenditure m = million RM = Ringgit CY = calendar year M-o-m = month-on-month ROA = return on assets Div yld = dividend yield NAV = net assets value ROE = return on equity DCF = discounted cash flow NM = not meaningful TP = target price DDM = dividend discount model NTA = net tangible assets trn = trillion DPS = dividend per share NR = not rated WACC = weighted average cost of capital EBIT = earnings before interest & tax p.a. = per annum y-o-y = year-on-year EBITDA = EBIT before depreciation and amortisation PAT = profit after tax YTD = year-to-date 4
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