KUALA LUMPUR: Unisem (M) Bhd is poised for a strong rebound in the upcoming quarters after a drag on earnings in the first quarter (Q1).

RHB Research said the drag in Unisem's earnings was due to lower-than-expected topline and margin pressure stemming from weak market conditions and higher payroll expenses.

Despite overall weakness in the semiconductor space, RHB Research said Unisem remains cautiously optimistic about better quarters ahead, backed by solid loading forecasts from most customers.

"However, we believe the loadings will not recover to the financial year 2022 (FY22) levels anytime soon, and hence, margins may remain under pressure, given the heightened electricity and staff costs," the bank-backed research firm said.

Unisem noted that its major customer involved in the application of electric vehicles (EVs) is relocating its supply chain to Malaysia, which should significantly boost its utilisation in the third quarter (Q3) and fourth quarter (Q4).

RHB Research said Unisem's Chengdu plant's utilisation was at about 70 per cent compared to the Ipoh plant's 50-55 per cent in Q1, as the assembly and test operations were significantly affected by weak demand.

"The Chengdu expansion should start contributing to the bottom line in FY23, and the Gopeng facility should contribute from Q1 2024.

"Total capex incurred in Q1 2023 was RM87.9 million for the construction of its Gopeng Plant and Phase 3 building in Chengdu," it said.

Following the weak results, RHB Research has cut its FY23 to FY25 earnings forecast by 27 per cent, 9 per cent, and 8 per cent after factoring in lower loadings and margin assumptions.

"While we believe the numbers are set to improve with better utilisation moving forward, we are unsure of the pace of recovery into the second half of 2023 (2H23)—it may not reach optimal utilisation rates due to its expansion plans.

"We downgraded Unisem to Neutral from Buy with a lower target price of RM2.86 from RM3.80," it added.