As an integrated engineering supporting services provider, UWC has great potential ahead supported by (1) resilient global semiconductor market outlook; (2) healthy equipment investment; (3) USD appreciation; and (4) cheap raw material. Majority of the IPO proceeds are earmarked for capacity expansion and repayment of bank borrowings. Going forward, we believe the progressive expansion plan will deliver top line growth of 6% but with an even stronger bottom line growth of 16% in FY20 thanks to improved efficiency. We initiate coverage with BUY rating and TP of RM1.11, based on 13x of CY20 EPS.

Background. Penang-based UWC is an integrated engineering supporting services provider, principally involved in precision sheet metal fabrication and value-added assembly services, and the fabrication of precision machined components. Over the past 29 years, UWC has built a strong brand and is serving many world class MNCs, including Agilent, Plexus, Teradyne, Bromma and more.

Resilient market outlook. After the record breaking 2018, the upbeat momentum did not spill over into 2019 as the market grapples with soft smartphone sales, inventory adjustments and US-China trade dispute. Industry experts are expecting an average YoY decline of 4.1% for 2019. However, we are not overly concern as this projected underperformance is mainly attributable to memory, a segment which UWC has no direct exposure. Excluding memory, the projected YoY decline is only a mere 1.8%, implying a relatively stable market.

Healthy investment. Similarly, 2019 equipment spending outlay is projected to shrink by 12.9% YoY in 2019 to USD56.2bn mainly due to memory correction. Adjusting for that, the investment is estimated to moderate by a mere 1.1% YoY, which is still considered healthy. On the contrary, SEA (UWC’s market concentration) is expected to grow robustly in 2019 and 2020 with 4.5% and 25.7% YoY, respectively. The ESI in Malaysia is projected to remain buoyant in the long term and register a CAGR of 6.9% from RM8.4bn in 2018 to RM11.7bn in 2023.

Favourable USD/RM. Stronger dollar is beneficial to UWC as circa 40-60% of its sales proceeds are dominated in USD while only 20-30% of its costs (majority material costs including steel and aluminum) are correlated to the greenback. Thus, this may give a boost its margin and profitability.

Cheaper raw materials. Both steel and aluminium prices reverted to their downtrends and we believe this is boon to UWC. Although UWC may share part of the cost savings with its customers, lower prices not only will result in lower direct material cost, also enhance efficiency in terms of inventory expenditures.

IPO proceeds. The total gross proceeds of approximately RM57.4m from the public issue will be mainly utilised for capacity expansion and repayment of bank borrowings.

Financials. Stronger 2HFY19 on the back of (1) equipment spending upcycle; (2) improved utilization rate; and (3) stronger USD / RM. We expect FY19 core net profit to expand modestly at 6.5% to RM26.2m. Going forward, we believe the progressive expansion plan will deliver top line growth of 5.8% but with an even stronger bottom line growth of 16.0% in FY20 thanks to improved efficiency.

Initiate with BUY and TP of RM1.11. In line with the valuation methodology for all tech companies under coverage, we use one-year forward (calendar year) PE valuation to derive the fair value of UWC. As such, we arrive with a TP of RM1.11, pegged to 13x of CY20 EPS, based on the simple average global peers’ valuation. We advocate investors to accumulate the stock as our fair value implies 35% upside.

Source: Hong Leong Investment Bank Research - 10 Jul 2019