UNISEM ... Feb10

S&P Results Review & Earnings Outlook

- Unisem’s full year net profit of MYR61.8 mln (+211.6% YoY) was above our expectations, mainly due to a MYR2.4 mln tax credit for the year (vs. our MYR6.9 mln tax expense estimate). Excluding this, pretax earnings and EBITDA were in line with our estimates.

- On a QoQ basis, net profit soared 35.9% to MYR35.1 mln in 4Q09, driven by its Chengdu operations which now accounts for 24% of revenue and more than 50% of the group’s bottom line. Segment wise, all units except for Unisem-Advanpack Technologies (UAT) – which undertakes packaging and bumping of semiconductor devices, have returned to profitability. Nevertheless, management expects UAT to
turn around in 2010, backed by stronger demand in mobile phones.

- Despite the typically slower period in 1Q10, management expects 3%-5% sequential growth, and sees a more positive 2010 coupled with healthy EBITDA margins (above 25%), driven by improved demand visibility and stronger chip recovery. According to management, there is currently a shortage of capacity in the outsourced assembly and test market, with no signs of inventory build-up. Management is guiding for a 50%-100% increase in capex for 2010 and expects 2010 to be the best year ever for the group in terms of revenue and earnings.

- We maintain our revenue forecast for 2010-2011 but raise our EBITDA margin assumption to 24.5% from 23% previously. As a result, we are now increasing our net profit projections by 5%-13% for 2010-2011.

Recommendation & Investment Risks

- We maintain our Strong Buy recommendation but raise our 12-month target price to MYR2.70 (from MYR2.10 previously) given our earnings upgrade and higher valuation amid the improving outlook.

- Unisem is expected to benefit from the recovery in chip demand and rising outsourcing trend in the region. We also like Unisem for its hands-on-management, conservative balance sheet (0.35x net gearing as at Dec. 31, 2009) and clear growth strategy.

- Our target price continues to be based on P/BV valuation. We are raising our target 2011 P/BV multiple (previously 2010 P/BV) to 1.1x (from 1x previously), based on a 15% premium (previously no premium) to Unisem’s historical 5-year median P/BV. We attach a premium to reflect the sector’s improving outlook. At current price,
valuations are attractive, in our opinion, trading at 2010 and 2011 PERs of 8.6x and 8.0x, respectively. Additionally, our target price also includes a projected tax-exempt DPS of 2.5 sen (from 2.3 sen).

- Risks to our recommendation and target price include a slower-thanexpected recovery in the semiconductor sector and appreciation in the MYR.