UMC reported 1Q23 core net profit of RM1.8m (+40.5% QoQ, NA YoY). Performance came in below our expectation, forming only 15% of our full-year forecast. The negative deviation to our forecast was due to lower-than-expected revenue, as the global chip shortage has led to delayed deliveries in its marketing and distribution segment. We cut our FY23-24f forecasts by 3-9% as we lower revenue contribution from the marketing and distribution segment. Post earnings revision, our TP is lowered to RM0.78 (from RM0.81), representing a PE multiple of 21.6x on its FY24f EPS of 3.6 sen. Reiterate HOLD on UMC.

Fell short of expectation. UMediC (UMC) reported 1Q23 core net profit of RM1.8m (+40.5% QoQ, NA YoY). Performance came in below our expectation, forming only 15% of our full-year forecast. The negative deviation to our forecast was due to lower than-expected revenue, as the global chip shortage has led to delayed deliveries in its marketing and distribution segment. Core net profit was arrived at after adjusting for EIs (mainly unrealised gain on marketable securities’ fair value adjustment) amounting to RM225k.

QoQ. UMC’s 1Q23 revenue registered a 52.7% growth, mainly supported by the stronger contribution from its marketing and distribution segment (+96.0% QoQ). This was on the back of stronger demand for medical devices and consumables in both public and private sectors, alongside with other healthcare service providers. We believe this is also partly due to seasonality factor, as orders from the public sector typically comes in stronger in 2H of the CY. Additionally, a more favourable foreign exchange rate has also contributed to the revenue growth. That said, despite AirdroX recording a full quarter of contribution in 1Q23 (commercialised in end -June), revenue for the manufacturing segment was rather flattish (-2%) due to routine maintenance for its production lines. In tandem with the growing revenue, core net profit grew by 40.5%.

YoY. Not Disclosed.

Outlook. Despite reporting weaker performance in 1Q23, we believe that the longer term growth trajectory remains intact as the hiccup was caused by short-term disruption of medical equipment supply. We also find comfort that both PH and BN’s manifestos have pledge to gradually increase public healthcare expenditure to 5% of GDP in the next five years as this would bode well for UMC via increased purchase of both medical equipment and consumables by the government. On top of that, the increasing trend of government prioritising procurement from local manufacturers is a positive sign for UMC. We believe UMC will continue growing from strength to strength in the coming years, owing to (i) stronger contribution arising from both manufacturing and marketing and distribution segment; (ii) huge room for market share improvement as UMC accounts for a mere 0.2% share of the total medical device industry in Malaysia; and (iii) new own-branded products in the pipeline that could yield better margins.

Forecast. We cut our FY23-24f forecasts by 3-9% as we lower revenue contribution from the marketing and distribution segment. We also introduce our FY25f earnings forecast of RM18.6m.

Maintain HOLD, with lower TP of RM0.78. Post earnings revision, our TP is lowered to RM0.78 (from RM0.81), representing a PE multiple of 21.6x on its FY24f EPS of 3.6 sen. Our valuation reflects a 10% premium to its peer average (consists of both local and international medical device manufacturers and distributors) of 19.6x, and we deem the premium justifiable, as we believe this is being compensated by the anticipated stronger earnings growth. Reiterate HOLD on UMC.

Source: Hong Leong Investment Bank Research - 5 Dec 2022