1QFY20 core net profit of RM10.6m (-5% QoQ, N/A YoY) exceeded expectations thanks to robust revenue and margin improvement. 1QFY19 figures are not available for comparison as it was newly listed. Proposed (1) 1-for-2 bonus issue; (2) employee SGS up to 10%; and (3) FY19 final DPS of 3 sen. Sequentially, flattish top line yielded lower bottom line due to thinner margin. Management is optimistic in FY20 with the incoming new capacity by year end. We raise our earnings projection which resulted in higher TP of RM2.61, pegged to 20x of CY20 EPS. However, we downgrade to HOLD after 218% gain since initiation. 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. 1QFY20 core net profit of RM10.6m (-5% QoQ, N/A YoY) forms 27% of our and consensus full year estimates, respectively. 1QFY19 figures are not available for comparison as it was newly listed. The outperformance was attributed stronger-than-expected sales along with margins. One-off adjustments in 1QFY20 include government grants amortization, forex gain and miscellaneous income.

Corporate proposals. (1) Bonus issue of up to 183.4m new UWC shares on the basis of 1 for every 2 existing shares held; and (2) establishment of an employee share grant scheme (SGS) of up to 10% of the total number of issued shares.

Dividend. Proposed a final single-tier dividend of 3 sen per share for FY19, subject to shareholder approval in AGM on 10 Jan 2020. If approved, it will go ex on 14 Jan.

QoQ. Turnover was flat at RM46.9m supported by strong semiconductor demand, especially on test equipment while life-science orders remained steady. However, core net profit was lower by 5% to RM10.6m due to higher cost structure and D&A despite partly cushioned by lower net interest expense and effective corporate tax rate (24% vs 4QFY19’s 27%).

YoY. 1QFY19 figures are not available for comparison as it was newly listed.

Outlook. Despite the unfavourable market sentiment and ongoing trade tensions between US and China, UWC remains optimistic about its FY20 business prospects. UWC will continue to acquire new customers and improve performance. With the new CNC machines which are slated to dock into the factory by year end, the group will relentlessly improve the efficiency as well as developing new products with existing and new customers. In turn, this will further expand the company.

Forecast. We tweak our FY20-22 revenue and margin assumptions which eventually lifted core net profit projections by 16%, 25% and 32%, respectively.

Downgrade to HOLD after 218% gain since our initiation on 10 Jul 2019. However, we raise our fair value to RM2.61 (from RM1.74) reflecting our upgrades in earnings and PE multiple. Our TP is derived based on 20x (previously 16x) of CY20 EPS after removing the 20% discount we applied earlier to its domestic and international peers’ average forward PE. We opine that UWC deserves a higher PE multiple given its solid growth trajectory ahead, leveraging on its expansion plan. The proposed bonus issue will also give market a feel-good factor. 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 - 18 Nov 2019