Maintain buy at RM1.86 with fair value of RM3.25: We maintain a 'buy' call on Unisem following its latest 3QFY10 results. Our forecast earnings of 28 sen per share are set to be achieved given that the strength of orders has yet to diminish despite economic concerns in Europe and the US.
Unisem's results, announced on Tuesday, were within our expectations. It posted a net profit of RM51.9 million, bringing 9M net profit to RM141.4 million on the back of a cumulative revenue of RM1.059 billion.
Year-to-date, the company has fulfilled about 75% of our estimated profit for FY10 (RM186 million), making up 76.3% of our topline numbers.
On a quarterly basis, net income improved 8.2% against 2QFY10, while revenue, the main indicator of the industry's strength, improved by 3.1%, partly because of seasonal effects.
Earnings before interest, taxes, depreciation and amortisation (Ebitda) margin in 3QFY10 rose 0.1 of a percentage point (ppt) to 26.5% from 26.4% over the previous quarter, largely due to a slight decrease in operating costs.
Production utilisation for all plants, we reckon, is still above 90%, not taking into account the new lines which would not have been producing at an optimal level yet.
We understand order visibility for the sector is normally between four and six months. While we have not got the firm order numbers from all companies under our coverage, early indications from Unisem's management are very positive, at least for 1QFY11, when compared with previous 1Qs.
We reckon the strength may spill over to 2QFY11. However, the outlook for the 2HFY11 remains a wild card.
On the supply side, any bottleneck within the supply chain that persists would prevent price deterioration. We recently met another production machine supplier, whose management confirmed to us that its orders had increased, stretching delivery time from a normal one month to the current four months.
We continue to value Unisem at RM3.25. Our 1.9 times price-to-book value is about a 10% discount to the previous up-cycle multiple, which we believe is justified as we are looking at a longer growth period (six quarters against four quarters in the previous up-cycles). We have also rolled over our valuation year to FY11. ' AmResearch, Nov 3
This article appeared in The Edge Financial Daily, November 4, 2010.
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