Unisem (Despite Cost Cutting Measures)

The worst maybe over for the company.

After two consecutive years of financial losses, management guided that the worse could be over as the group has restructured itself and is in a position to sail back into profitability in 2014.

Over the past few quarters, management has focused on product discontinuation of low volume products and has sought to raise average selling prices (ASPs) for others. Unisem had also further rationalised its headcount in Batam and decided to shut its Wales operations.

Unisem anagement’s decision to close its Europe plant was due to: 1) Wales being no longer profitable; and 2) having adopted a new business strategy where management are more focus towards top tier and mid customer rather than new entrants in the industry.

Collectively, Batam and Wales have been a drag to Unisem to the tune of RM15mil to RM20mil in losses over the past few years.

The management guided that the turnaround in Batam plant was already bearing fruit and had turned earnings before interest, tax, depreciation and amortisation (EBITDA) positive in November 2013.

Expect Unisem to register its final quarter of loss in 4Q13 on further restructuring charges, but expect a sharp turnaround in profitability in 2014 due to Unisem’s leaner operating structure.

Without losses from Wales and Batam as well as continued profitability from its Ipoh and China units, Unisem can achieve a FY14 net profit.

Nevertheless, despite being in the same industry, the performance of UNISEM and MPI could not be more different. This is because the two semiconductor players focus on different areas of the industry.

Both companies are export based with exposure to the US dollar, yet UNISEM continues to be loss making while MPI’s earnings are rising.

The divergent fates of the two companies could be attributed to their product mix.

Unisem caters for the auto industrial, communications, PC and consumer electronics segments whereas MPI focuses on the smartphone and tablet and PC segments, where demand is higher and the profit margins better.

That is what makes UNISEM different from other companies in the industry.

The smartphones and tablet segment contributed 36% to MPI’s revenue in 1QFY2014 ended Sept 30, up from 33% a year ago, while UNISEM, its consumer segment was its largest revenue contributor, accounting for 29% in 3QFY2013 ended Sept 30.

The areas UNISEM focuses on may have contributed to its lower utilization rate. By comparison, MPI’s utilization rate has been improving over the last two quarters – it was 82% to 83% in 1QFy2014.

For companies in the semiconductor industry, the most important thing is to boost their utilization rate. The threshold differs from company to company but generally, UNISEM’s utilization rate is lower which is possibly why there has been no profit translation.

It was reported that MPI’s successful transition to high margin businesses and stringent cost controls should continue to keep the company in the black.

Based on sales by end product, the revenue of MPI’s smartphone and tablet division grew while that of its PC division expanded. Whereas UNISEM says the continued poor performance was due to low sales volume and a drop in average selling prices.

UNISEM still lacks re rating catalysts for now (Nov 2013) and that most of the negative factors including its bleak near term outlook should have been priced in