3QFY20 core net profit of RM13m (-1% QoQ, +35% YoY) was a beat thanks to robust revenue and sustainable margin even during this challenging period. Top line was driven by both semiconductor and life-science customer demands as order book remain resilient. We raise our earnings projection which resulted in higher TP of RM3.45, pegged to 28x of CY21 EPS. As such, we upgrade UWC to BUY given its solid growth trajectory ahead. The escalating trade intensity may eventually benefit UWC which provides one-stop solution as more firms look for alternatives to avoid import tariffs.

Beat expectations. 3QFY20 core net profit of RM13m (-1% QoQ, +35% YoY) sums 9MFY20’s total to RM37m (+113% YoY), forming 74% and 76% of HLIB and street full year estimates, respectively. Considering 3Q’s seasonal weakness (9M19 core net profit accounted for 61% of FY19’s) and further impacted by MCO, we deem this as an outperformance attributable to stronger-than-expected turnover along with resilient margin. One-off adjustments in 9MFY20 include government grants amortization (RM0.9m), forex gain (RM1.1k) and miscellaneous income (RM0.2m).

Dividend. None (3QFY19: None).

QoQ. Despite suboptimal (50%) capacity utilization during MCO period, turnover was higher by 2% at RM56m supported by strong demands from semiconductor and life science customers. It was involved in the supply chain of Covid-19 related equipment supporting the front-line analysis and contributed in the fight against the pandemic. However, core net profit eased marginally by -1% mainly due to higher D&A.

YoY. Top line jumped 46% while driven by stronger demand from global customers in the semiconductor and life science industries, sufficiently offset the decline in heavy duty segment. In turn, this translated into a +35% hike in core earnings.

YTD. For the same reason as above, revenue surged 62% to RM158m while core net profit more than doubled (+113%) to RM37m

Order book. Ended 3QFY20 with RM60m (+3% QoQ) and this is holding resiliently as UWC has yet to receive any order cancellation or deferment. IT has been receiving consistent enquiries from existing and new customers.

Sales breakdown. For 3QFY20, semiconductor: 74%; life science and medical: 18%; and heavy duty and others: 8%.

Outlook. UWC is optimistic over its long-term performance despite trade tension and global pandemic. Semiconductor will be driven by demand to support remote working, 5G and AI adoptions. As for life science, UWC is expediting the qualification for selected items and continue to work closely with customers for future developments.

Forecast. We tweak our FY20-22 revenue assumption which eventually lifted core net profit projections by 3%, 6% and 14%, respectively.

Upgrade to BUY with a higher TP of RM3.45 (from RM2.59) reflecting our upgrades in earnings and PE multiple. Our TP is derived based on 28x (previously 23x) of CY21 EPS. 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 companies shift productions out of China to avoid import tariffs.

Source: Hong Leong Investment Bank Research - 5 Jun 2020