Currency volatility, rising cost challenges for Unisem


CGSI Research said it was concerned over the company's subdued operating margin trajectory.

PETALING JAYA: Unisem (M) Bhd’s topline outlook appears decent in the near term, but currency volatility and rising cost may have an impact on its earnings ahead.

This and other factors prompted CGS International (CGSI) Research to cut its financial year 2024 (FY24) to FY26 earnings per share (EPS) by 30% to 49%, as it imputed a lower ringgit to dollar assumption of 4.1 to 4.4 versus 4.3 to 4.5 previously.

It also incorporated higher startup costs related to its new operations.

The research house said these adjustments in turn reduce its projected earnings before interest, tax, depreciation and amortisation margin to 20% to 24% versus 25% to 28% previously. It estimates that each 5% change in the dollar to US average impacts Unisem’s FY25 to FY26 EPS by about 23%.

CGSI Research said it was concerned over its subdued operating margin trajectory, given rising costs related to the capacity expansion of its Chengdu plant as well as mobilisation cost, as its Malaysian operations moved from the Ipoh plant to its new Gopeng plant in Perak.

In order to cushion this impact, Unisem will pause new hirings and increase automation to improve its operational efficiency, it added.

CGSI Research maintained its “reduce” call on the stock, given the persistent weak earnings delivery on a subdued recovery outlook, coupled with headwinds from a strengthening ringgit against the US dollar.

It added that its current steep valuation of 36.7 times FY25 price earnings ratio versus its pre-pandemic FY15 to FY19 average of 18 times and peer average of 23.6 times.

Its target price was lowered to RM1.60 a share.

It cited upside risks that include stronger than-expected recovery in consumer spending, major breakthroughs in new businesses and a weakening ringgit versus the dollar.

The derating catalysts cited are prolonged softness in consumer spending, failure to pivot into new growth areas and continued ringgit strength versus the dollar.

Unisem’s third quarter 2024 (3Q24) core net profit (ex-foreign exchange gain of RM12mil) declined by 22% year-on-year (y-o-y) despite a 15% y-o-y increase in revenue, as the group incurred lower operating margins amid its capacity expansion initiatives and strengthening ringgit versus the dollar.

Offering some reprieve amid currency headwinds is the ramp-up of Unisem’s back-end production of power management applications for its key customer to meet demand growth from high-performance computing, servers and electric vehicles, it said.

CGSI Research understands that Unisem is also benefiting from increased sales to China original equipment manufacturers (OEMs) as well as sales of wearable products for US-based OEMs. Both of which should continue to support its strong dollar revenue growth momentum going into 4Q24, the research house said.

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