KUCHING: Unisem (M) Bhd (Unisem) is set to extend its run on its quarter-on-quarter (q-o-q) topline growth to four straight quarters when it releases its first quarter (1Q) results next month.For the record, the group expected its topline to head into positive territory, as it had dialled down the first quarter revenue growth estimated from five to eight per cent q-o-q to zero to five per cent q-o-q. Unisem also expected the bottomline to move in tandem with the topline.
CIMB Investment Bank Bhd (CIMB Investment) expected the group to report a six to eight per cent rise in the first quarter core net profit and a zero to five per cent rise in the topline, in keeping with its guidance and the release of two of the group’s major customers.
The research firm believed that earnings before interest, tax, depreciation and amortisation (EBITDA) margins to improve from zero to 0.5 per cent points q-o-q, driven by operating leverage.
On an annualised basis, the results were likely to be ahead of the previous forecast due to stronger revenue growth from the solid demand and margin expansion from rising contributions from the higher-margin operations in China and higher operating leverage as capacity utilisation runs at full tilt.
Theoretically, the fairly strong quarter could be linked to strong demand as the global economy began to emerge from the ashes of the recession, the ongoing shortage in the test and assembly sector, the fairly low inventory channels and the strong demand in certain key segments.
The research firm highlighted that the group was currently running at full capacity at its two main operational hubs. The Chengdu plant was maxed out on both man and equipment capacity. Its Ipoh plant was also facing similar constraints although it had about 10 to 15 per cent spare equipment capacity.
As for Batam, the plant was operating at 70 per cent utilisation. The group was consciously transforming the operation into an auto hub centre and was focusing on securing more integrated circuit (IC) design houses as customers.
Unlike the past year when visibility was hazy, Unisem was now able to see several quarters ahead. It forecasted sequential growth in topline for the next two to three quarters, which would mark six to seven consecutive quarters of topline growth.
As a result, Unisem now projected its financial year 2010 (FY10) topline to soar 44.8 per cent year-on-year (y-o-y) to RM1.5 billion, driven by growth across all of its operations. It believed that FY10 revenue could increase 50 to 60 per cent for the Ipoh plant and double for the Chengdu plant, led by the economic growth and stimulus packages. RM1.5 billion would be an all-time high for revenue.
CIMB Investment believed that this was driven by Unisem’s aggressive expansion in Chengdu where it would rise on the upsurge in demand in China and turnaround in Batam. Chengdu operations could potentially make up close to 30 per cent of revenue for this year and about 40 per cent for next year.
Nevertheless, Unisem believed that the current round of demand had been fuelled by true demand. It also believed that the inventory replenishment cycle had largely played itself out and was not a factor in the strong growth seen thus far, unlike a couple of quarters ago.
By looking at the current trend, most market researchers were quite upbeat on the prospects for this year, projecting 10 to 27 per cent increase in chip sales. IC insight were the most bullish of the three, estimating a 27 per cent rise in chip sales this year.
On Unisem’s financial front, the book-to-bill ratio had been consistently above one times since July last year and had hovered around the 1.2 times mark for the past few months. The bookings had risen to levels last seen in 2007.
The group had publicly guided an FY10 capex of around RM190 million to RM220 million as it looked to expand its capacity in China aggressively. It would also expand and possibly double its capacity at UAT and was planning a wafer-bumping fab for UAT in China sometimes in 2011.
Despite having a healthy balance sheet with net gearing falling to 0.34 times at end of last year, Unisem would use any access funds to pare down its debt as it was looking to de-gear ultimately. It had repaid about RM245 million in borrowings over the past two years.
For this reason, CIMB Investment maintained its target price at a fair value of RM4.44 per share. Unisem remained to be the research firm top pick in the sector as it was more liquid and had a higher beta.