UWC’s FY19 core net profit of RM28.5m (+15.6% YoY) exceeded expectation thanks to robust sales and margin improvement. Apart from forex boost, the sturdy set of results was contributed by strong orders from semiconductor customers coupled with favourable product mix (higher requirements) which led to higher GP margin. Management is optimistic in FY20 while highlighting the seasonal softness during year end festive season. We raise our earnings projection which resulted in higher TP of RM1.74, pegged to 16x of CY20 EPS. Maintain BUY. The escalating trade intensity may eventually benefit UWC which provides one-stop solution as more US companies look for alternatives to avoid import tariffs.

Beat expectation. 4QFY19 core net profit of RM11.1m (+13.3% QoQ, N/A YoY) brought FY19’s total to RM28.5m (+15.6% YoY), forming 108.8% of our full year estimate. The outperformance was attributed stronger-than-expected top line and EBITDA margin coupled with lower-than-expected D&A. One-off adjustments in 4QFY19 include listing expenses, government grants, asset write-off / disposal, forex gain and miscellaneous income.

Dividend. None.

QoQ. Top line was stronger by 22.4% to RM46.9m due to stronger demand from semiconductor customers especially on the test equipment and partly aided by favourable forex (4QFY19: RM4.15/USD vs 3QFY19: RM4.09/USD). In turn, core net profit strengthened by 13.3% to RM11.1m thanks to favourable product mix.

YoY. There was no comparative figure (4QFY18) available as it was newly listed. However, it commented that 4QFY19’s top and bottom lines were mainly contributed by both sheet metal fabrication and assembly as well as machining segments mainly from its semiconductor customers.

YTD. Revenue gained 5.8% to RM144.4m on the back of higher customer orders. Core net profit improved by 15.6% to RM28.5m thanks to higher requirements from customers such as more stringent quality control and higher product complexity that led to higher gross profit margin.

Outlook. Despite the ongoing trade tension between US and China, UWC remains optimistic about its business prospect in FY20. It is working with potential customers to widen customer base and increase order volume. UWC will continue to develop more design with existing and new customers, improve technology development, process improvement and automation to ensure long-term sustainability. However, the management also highlighted that demand is relatively soft during the year-end festive season.

Forecast. In view of the deviations mentioned above, we tweaked our FY20-21 core net profit projections upward by 28.3% and 26.5%, respectively. FY22 estimate is also introduced. Reiterate BUY on the back of higher fair value of RM1.74 (from RM1.11) reflecting our upgrades in earnings and PE multiple. Our TP is derived based on 16x (previously 13x) of CY20 EPS, circa 20% discount to its domestic and international peers (see Figure #2). We opine that UWC deserves a higher PE multiple given its solid growth trajectory ahead, leveraging on its expansion plan. The escalating trade intensity may eventually benefit UWC which provides a one-stop solution as more US companies look for alternatives to avoid import tariffs.

Source: Hong Leong Investment Bank Research - 4 Sept 2019