As a beneficiary of the pandemic, UMC saw its core earnings grow at a CAGR of 103% from FY19-FY21 due to a boost in medical devices and consumables’ demand. Going forward, we are projecting for FY22/23/24f earnings to grow by 31.7%/41.0%/18.1%, far exceeding the 12.1% CAGR projected by Protégé for the local medical device industry. We initiate coverage on UMC with a BUY recommendation and TP of RM0.61 based on a P/E multiple of 18x (in line with peers average). While we acknowledge that UMC’s market capitalisation is considerably smaller, we deem the valuation justifiable as we believe this is compensated by the stronger earnings growth expected.

Riding on the growing market. Malaysia is deemed as a manufacturing hub for medical devices in the region, as it is home to over 200 medical device manufacturers. Protégé projects the medical device industry in Malaysia to grow at a 5-year CAGR of 12.1%, to a market size RM21.41bn by CY26f. This will be supported by (i) pent up demand for healthcare services locally; as well as (ii) government shifting its focus to improving the country’s public healthcare system post pandemic. Increased demand for healthcare services would result in higher usage of medical consumables and also potentially speeding up the replacement cycle of medical equipment, both of which presents an opportunity to UMC.

On expansion mode. In anticipation of its future commercialisation of products and also an increase in its inventory level of distribution products, UMC intends to expand its premise by adding (i) a 30k sqft production floor; and (ii) a 5k sqft storage space. The planned expansion of production floor space is 3.6x of its current space and can house up to two new production lines upon completion. IPO proceeds of RM3.5m has been earmarked for the construction of this new site, with construction expected to begin in 1HCY23 and commencement of operations targeted in 2HCY24.

Growing product offerings. Tapping on its R&D capabilities, UMC is targeting to expand its manufacturing division by developing and commercialising more own branded products. As of current, UMC has identified several new products to be commercialised in the coming two years, namely (i) sterile water for inhalation; (ii) prefilled nebulisers; (iii) digital oxygen flowmeters; and (iv) humidifier humidity sensors. At the same time, UMC is also looking to source more innovative medical devices from existing suppliers and principals, as well as developing new brand distribution business. Extensive amount of time required to bring a product to the market and stringent selection process by the principals and suppliers would serve as a natural barrier to entry, in our opinion.

Rising to new heights. As a beneficiary of the pandemic, UMC’s core earnings grew at a CAGR of 103% from FY19-FY21 due to better medical devices sales. Going forward, we are projecting for FY22/23/24f earnings to grow by 31.7%/41.0%/18.1%, far exceeding the 12.1% CAGR projected by Protégé for the local medical device industry. This will be due to (i) stronger revenue contributions from both segments; (ii) huge room for market share improvement as UMC accounting for a mere 0.2% share of the total medical device industry in Malaysia; and (iii) stronger contribution from its manufacturing segment that fetches higher margins.

Initiate coverage with a BUY, TP: RM0.61. We value UMC based on a PE multiple of 18x, in line with the peer average which consists of both local and internation al medical device manufacturers and distributors. While we acknowledge that UMC’s market capitalisation is considerably smaller, we deem the valuation justifiable as we believe this is being compensated by the stronger earnings growth expected. Initiate with a BUY recommendation and a TP of RM0.61.

Source: Hong Leong Investment Bank Research - 26 Jul 2022