Unisem ... May11

The strengthening of the ringgit has hit the numbers of semiconductor players hard. Companies such as Unisem (M) Bhd and Malaysian Pacific Industries Bhd (MPI) saw their earnings fall due to the rally of the ringgit against the US dollar.

The effect of the weakening dollar against emerging market currencies will make it less attractive for semiconductor companies to outsource. Since most Malaysian semiconductor companies depend on outsourcing contracts from major integrated devices manufacturers from the US, these companies may lose their competitive edge in the longer term if the rising trend of the ringgit is not reversed.

In the longer run, the viability and commercial attractiveness in OSAT (outsourced chips assembly and testing) is questioned if the US dollar stays at this level. A cheaper dollar acts as a natural adjustment mechanism in addressing global trade imbalances.

The double-digit decline in sales for Unisem’s 1QFY11 ended March 31, despite positive global semiconductor sales growth, may be an early and telling sign that outsourcing requirement is declining.

Its net profit plunge 87% to RM5.09 million for its 1Q11 ended March 31 from RM41.63 million a year before. Its revenue dropped 11.2% to RM291.98 compared with RM329 million recorded a year ago.

MPI also posted weaker earnings recently. The company saw its net profit for its 3QFY11ended March 31 slide 81% to RM5 million compared with RM27 million the year before. Revenue was down 5% to RM334.8 million.

Both Unisem and MPI blamed the strengthening of the ringgit for the disappointing earnings performances for the March 2011 quarter. The rise of the ringgit is not expected to slow down soon. Hence, companies like Unisem which trade in dollar terms should buckle up for a more challenging future.