FY21 core net profit of RM90m (+63% YoY) missed HLIB and consensus estimates. This disappointment was due to logistical challenges and capacity restrictions as a result of MCO3.0/ Phase 1. Order book remained at c.RM100m. Outlook remains robust amidst these challenging times and newly-leased Taiping factory has commenced operation. Reiterate BUY with lower TP of RM6.75 (50x on FY23 EPS), reflecting the downward earnings revision. The escalating trade intensity may eventually benefit UWC which provides one -stop solution as more firms look for alternatives to avoid import tariffs.

An inevitable disappointment. 4QFY21 core net profit of RM16m (-28% QoQ, -9% YoY) brought FY21’s sum to RM90m (+63% YoY) which missed estimates, accounting for 89% and 93% of our and consensus full year forecasts, respectively. The top line miss was due to logistical challenges and capacity restrictions as a result of MCO3.0/ Phase 1. One-off items in FY21 include government grants amortization (- RM1.2m), PPE disposal gain (-RM235k), PPE written off (+RM8k), miscellaneous income (-RM548k) and forex gain (-RM35k).

Dividend. Declared DPS of 1.67 sen (4QFY20: 1.0 sen), representing 20% payout ratio. This will go ex on 22 Sep. YTD DPS amounted to 1.67 sen (FY20: 1.0 sen).

QoQ. Turnover eased 11% mainly due to lower contributions from semiconductor and heavy duty segments. Besides the prolonged logistical issue, UWC’s capacity utilization was limited at 60% (12 May -6 Jul) and 80% (7Jul-19 Aug) as a result of MCO3.0/ Phase 1. In turn, core earnings fell by 28% due to diminishing economies of scale as adjusted EBITDA margin shrank by 4ppt.

YoY. Sales inched up 4% as orders from semi and life science segments improved. However, core earnings decreased by 9% to RM16m on the back of lower adjusted EBITDA margin (38% vs 4QFY20’s 41%) and higher D&A (+13%).

YTD. Top line surged 30% as all segments recorded growths led by life science / medical (+88%), followed by heavy duty (+30%), semiconductor (+18%) and others (+4%). In turn, core earnings surged by 59% attributable to EBITDA margin expansion from efficiency gain.

Sales breakdown. For FY21, semi: 66% (FY20: 73%); life science / medical: 26% (18%); heavy duty: 4% (4%); and others: 4% (5%).

Order book. As of 1 Sep 2021, order book attained slightly more than RM100m (rather flat QoQ) with semi: 79%; life science / medical: 18%; and others: 3%.

Outlook. 80% of employees have received 2 doses of vaccination and UWC was allowed to operate at full capacity since 20 Aug. There was no order cancellation when output was restricted. Instead, it continued to receive orders from semiconductor, life science and 5G test equipment customers. Newly-leased Taiping factory has commenced operation in Aug with 49 new staff. It is in the midst of developing other medical equipment to test the mutated Covid-19 strains with clients.

Forecast. Tweak model based on the deviation mentioned above. As a result, FY22- 23 earnings are revised downward by 7% and 17%, respectively. Reiterate BUY with a lower TP of RM6.75 (previously RM7.00), pegged to unchanged 50x of FY23 EPS (previously CY22 EPS). The ongoing 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 - 8 Sept 2021